PROMOTING INNOVATION AND ECONOMIC GROWTH THE SPECIAL PROBLEM OF DIGITAL INTELLECTUAL PROPERTY
A REPORT BY THE DIGITAL CONNECTIONS COUNCIL OF THE
CED is a nonprofit, COMMITTEE FOR nonpartisan organization ECONOMIC of business leaders and DEVELOPMENT educators that has worked for sixty years to address the critical economic and social issues facing MARCH 2004 American society. PROMOTING INNOVATION AND ECONOMIC GROWTH
THE SPECIAL PROBLEM OF DIGITAL INTELLECTUAL PROPERTY
A REPORT BY THE DIGITAL CONNECTIONS COUNCIL OF THE COMMITTEE FOR ECONOMIC DEVELOPMENT
MARCH 2004 Promoting innovation in the on-line world: the problem of digital intellectual property / a report by the Digital Connections Council of the Committee for Economic Development
Library of Congress Cataloging-in-Publication Data can be found at the Library of Congress.
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COMMITTEE FOR ECONOMIC DEVELOPMENT 2000 L Street, N.W., Suite 700, Washington, D.C. 20036 (202) 296-5860
www.ced.org CONTENTS
RESPONSIBILITY FOR CED STATEMENTS ON NATIONAL POLICY iv
PREFACE BY THE CED RESEARCH AND POLICY COMMITTEE vii
INTRODUCTION AND STATEMENT BY THE CED RESEARCH AND POLICY COMMITTEE viii
EXECUTIVE SUMMARY 1
I. INTRODUCTION 3
II. COPYRIGHT AND THE ECONOMICS OF INNOVATION 5
III. THE DEVELOPMENT OF COPYRIGHT 7
IV. COPYRIGHT BACKGROUND: SECOND PHASE 13
V. COPYRIGHT BACKGROUND: THIRD PHASE 18
VI. DISCUSSION OF “SOLUTIONS” FOR DIGITAL COPYRIGHT INFRINGMENT 24
VII. FINDING A BETTER PATH 44
RECOMMENDATIONS 45
CONCLUSION 53
ENDNOTES 54
OBJECTIVES OF THE COMMITTEE FOR ECONOMIC DEVELOPMENT 56
iii RESPONSIBILITY FOR CED STATEMENTS ON NATIONAL POLICY
The Committee for Economic Develop- specific legislative proposals; its purpose is to ment is an independent research and policy urge careful consideration of the objectives set organization of some 250 business leaders and forth in this statement and of the best means of educators. CED is nonprofit, nonpartisan, and accomplishing those objectives. nonpolitical. Its purpose is to propose policies Each statement is preceded by extensive dis- that bring about steady economic growth at cussions, meetings, and exchange of memo- high employment and reasonably stable prices, randa. The research is undertaken by a sub- increased productivity and living standards, committee, assisted by advisors chosen for their greater and more equal opportunity for every competence in the field under study. citizen, and an improved quality of life for all. The full Research and Policy Committee All CED policy recommendations must have participates in the drafting of recommenda- the approval of Trustees on the Research and tions. Likewise, the trustees on the drafting Policy Committee. This committee is directed subcommittee vote to approve or disapprove a under the bylaws, which emphasize that “all policy statement, and they share with the research is to be thoroughly objective in char- Research and Policy Committee the privilege acter, and the approach in each instance is to of submitting individual comments for publica- be from the standpoint of the general welfare tion. and not from that of any special political or economic group.” The committee is aided by a The recommendations presented herein are those Research Advisory Board of leading social sci- of the Trustee members of the Research and Policy entists and by a small permanent professional Committee and the responsible subcommittee. They staff. are not necessarily endorsed by other Trustees or by The Research and Policy Committee does nontrustee subcommittee members, advisors, contrib- not attempt to pass judgment on any pending utors, staff members, or others associated with CED.
iv RESEARCH AND POLICY COMMITTEE
Co-Chairmen RONALD R. DAVENPORT ALONZO L. MCDONALD Chairman of the Board Chairman and Chief Executive Officer PATRICK W. GROSS Sheridan Broadcasting Corporation Avenir Group, Inc. Chairman, The Lovell Group Founder, AMS JOHN DIEBOLD NICHOLAS G. MOORE Chairman Chairman Emeritus BRUCE K. MACLAURY John Diebold Incorporated PricewaterhouseCoopers President Emeritus The Brookings Institution FRANK P. DOYLE STEFFEN E. PALKO Retired Executive Vice President Vice Chairman and President General Electric XTO Energy Inc. Vice Chairmen T.J. DERMOT DUNPHY CAROL J. PARRY IAN ARNOF Chairman President Retired Chairman Kildare Enterprises, LLC Corporate Social Responsibility Bank One, Louisiana, N.A. Associates CHRISTOPHER D. EARL CLIFTON R. WHARTON, JR. Managing Director VICTOR A. PELSON Former Chairman and Chief Executive Perseus Capital, LLC Senior Advisor Officer UBS Warburg LLC TIAA-CREF W. D. EBERLE Chairman PETER G. PETERSON Manchester Associates, Ltd. Chairman The Blackstone Group EDMUND B. FITZGERALD REX D. ADAMS Managing Director NED REGAN Professor of Business Administration Woodmont Associates President The Fuqua School of Business Baruch College Duke University HARRY L. FREEMAN Chair JAMES Q. RIORDAN ALAN BELZER The Mark Twain Institute Chairman Retired President and Chief Operating Quentin Partners Co. Officer BARBARA B. GROGAN AlliedSignal Inc. President LANDON H. ROWLAND Western Industrial Contractors Chairman PETER A. BENOLIEL Janus Capital Group Chairman, Executive Committee RICHARD W. HANSELMAN Quaker Chemical Corporation Chairman GEORGE RUPP Health Net Inc. President ROY J. BOSTOCK International Rescue Committee Chairman Emeritus, Executive RODERICK M. HILLS Committee Chairman ROCCO C. SICILIANO Bcom3 Group, Inc. Hills Enterprises, Ltd. Beverly Hills, California
FLETCHER L. BYROM MATINA S. HORNER MATTHEW J. STOVER President and Chief Executive Officer Retired Executive Vice President President MICASU Corporation TIAA-CREF LKM Ventures
DONALD R. CALDWELL H.V. JONES ARNOLD R. WEBER Chairman and Chief Executive Officer Managing Director President Emeritus Cross Atlantic Capital Partners Korn/Ferry International Northwestern University
CAROLYN CHIN EDWARD A. KANGAS JOSH S. WESTON Chairman Chairman and Chief Executive Officer, Honorary Chairman Commtouch/C3 Partners Retired Automatic Data Processing, Inc. Deloitte Touche Tohmatsu A. W. CLAUSEN DOLORES D. WHARTON Retired Chairman and Chief Executive JOSEPH E. KASPUTYS Former Chairman and Chief Officer Chairman, President and Chief Executive Officer BankAmerica Corporation Executive Officer The Fund for Corporate Initiatives, Inc. Global Insight, Inc. JOHN L. CLENDENIN MARTIN B. ZIMMERMAN Retired Chairman CHARLES E.M. KOLB Vice President, Corporate Affairs BellSouth Corporation President Ford Motor Company Committee for Economic Development
GEORGE H. CONRADES CHARLES R. LEE Chairman and Chief Executive Officer Chairman Akamai Technologies, Inc. Verizon Communications
*Voted to approve the policy statement but submitted memoranda of comment, reservation, or dissent, See page 41
v DIGITAL CONNECTIONS COUNCIL
Chairman EDWARD HOROWITZ LOUIS RANA Chairman Senor Vice President PAUL M. HORN EdsLink LLC Consolidated Edison Company of Senior Vice President, Research NY, Inc. IBM Corporation RICHARD HOWARD Vice President, Wireless Research ANDREW STRICKER (Retired) Associate Provost – Innovation Bell Laboratories, Lucent Technologies Through Technology CED Trustees Vanderbilt University LARRY JACKEL CAROLYN CHIN Research Professor, Department of DEBORAH TRASKELL Chairman Computer Science Vice President – Enterprise Commtouch/C3 Partners Rutgers University Technology Office State Farm Insurance IRWIN DORROS RAY JORDAN President Vice President, Information PAUL TURNER Dorros Associates Pfizer, Inc. Executive Vice President and Chief Technology Officer JOSEPH GANTZ JOHN E. KOLB American Management Systems, Inc. Partner Chief Information Officer GG Capital, LLC Rensselaer Polytechnic Institute COLIN WATSON Senior Vice President PATRICK W. GROSS CAMPBELL LANGDON KeySpan Chairman, The Lovell Group Corporate Vice President, Founder and Senior Advisor, AMS Strategic Development ALAN YOUNG Automatic Data Processing Executive Director, Information MATTHEW J. STOVER Security Services President JOHN LEE Citigroup LKM Ventures Director of Information Technology Nektar Therapeutics
TARIQ MUHAMMAD Project Director Members Interactive Media Director Earl G. Graves Publishing/ ELLIOT MAXWELL REGINALD FOSTER Black Enterprise Magazine Consultant Chairman and Chief Executive Officer Alpine Access, Inc. ROBERT OBEE Chief Information Officer WILLIAM FRIEL Roadway Express Project Associate Senior Vice President and Chief Chief Technology Integration Officer Information Officer Yellow Roadway Enterprise Services SUSAN CRAWFORD Prudential Financial Assistant Professor of Law WILLIAM PLUMMER Cardozo School of Law, NYC MARK GULLING Vice President, Strategic and Vice President, Chief Information Officer External Affairs Eastman Kodak Company Nokia
vi PREFACE BY THE CED RESEARCH AND POLICY COMMITTEE
After the publication of CED’s policy state- The DCC report is accompanied by a brief ment, The Digital Economy: Promoting introduction by the CED Research and Policy Competition, Innovation, and Opportunity in Committee. Since this report is the work of 2001, the Research and Policy Committee the DCC rather than CED Trustees, it is not created CED’s Digital Connections Council, an official CED policy statement. The a group of information technology experts Research and Policy Committee, however, on from CED trustee-affiliated companies. The behalf of CED’s Trustees, welcomes this DCC was established to advise CED on the report and recommends it to readers as an policy issues associated with cutting-edge excellent analysis of the issue of balancing technologies. This report, concerning the intellectual property rights and the incentives relationship between digital intellectual for long-term growth in the digital age. property and economic growth, is the first of its products. Patrick W. Gross, Co-Chair CED appreciates greatly the efforts of the Research and Policy Committee members of the Committee, and in particular, Chairman, The Lovell Group the work of Paul Horn, Senior Vice President Founder and Senior Advisor, AMS for Research of IBM Corporation and Chair of the DCC, for his leadership in bringing Bruce K. MacLaury, Co-Chair this report to completion. Research and Policy Committee President Emeritus The Brookings Institution
vii INTRODUCTION AND STATEMENT BY THE CED RESEARCH AND POLICY COMMITTEE
Digital piracy — the theft of entertain- that of economic growth and productivity. ment products in digital form from the That is, what is the affect of digital piracy on Internet — has become a fast-growing activity growth, productivity, and our future standard and, for many, a pressing economic and social of living, and what would be the effects of concern. Easy access to copyrighted works alternative policies to curb it? That is the per- through file-sharing programs has allowed spective of the DCC report and, in the midst many users almost unlimited access to record- of what is often a passionate debate, it is an ed music and, over time, other types of enter- important starting point. tainment in digital form. Along with this The purpose of the institution of intellec- access has come a regrettable change in pub- tual property, as the DCC report makes clear, lic ethos that has made it acceptable or trivial is to provide incentives to innovators to pro- in the eyes of many to pirate creative works. duce new creations. But the reason why these Piracy is claimed to have imposed severe incentives are in order is not because of a losses on content producers, but the real concern with the prosperity of innovators, but damages arising from piracy are hard to mea- because of a larger desire to provide to soci- sure. Music industry sales of CDs are down, ety a steady stream of innovations that lead to but not necessarily outside the range of varia- further gains and enhancements of the stan- tion they have shown in the past. Moreover, dard of living. “If I see further,” Newton once comparable technological challenges have remarked, “it is because I stand on the shoul- always been met by claims of imminent disas- ders of giants.” Like Newton, every innovator ter: the VCR was said to be the end of the in some crucial way owes a substantial debt to movie industry; the player piano was predict- the innovators who went before her or him. ed to ruin sales of sheet music; and radio was The purpose of protection for intellectual expected by many to end live attendance at property, therefore, is to keep this virtuous baseball games. But in all of these cases, the cycle of innovation going — to keep new technological advance proved to expand, innovations flowing to those who improve rather than reduce, the growth of the service upon them so that those innovations, in turn, in question, as the businesses involved devel- can be used by still others. This process lies at oped new models that incorporated the new the heart of long-term economic growth.† technology into their product design and This process, therefore, requires that intel- marketing. This may well be the case for the lectual property law and policy strike a fine network-based provision of music and other balance between the rights of innovators (cre- services, but the transition is still a distant one ators) and the right of subsequent imitators and the immediate problem of piracy and users (disseminators) who turn those cre- remains. ations into new economic activity. In order to The many analyses of the piracy issue have help create this balance, intellectual property taken one of two focuses — either the effect law and custom have established a “public of piracy on specific economic interests (such domain,” that is, a class of intellectual proper- as the music industry) or the moral or ethical implications of digital theft. While these are † See, CED, How Economies Grow: The CED Perspective on Raising reasonable perspectives, the lens through the Long-Term Standard of Living (Washington, DC: May 2003) which CED traditionally views these issues is for an explanation of this relationship.
viii ty to which the public has some right. The and users and towards innovators. Finally, we copyrights to some works may expire after a are concerned about proposals that direct the fixed time period. In addition, the purchasers government to anoint one particular techno- of an intellectual work like a book or record logical solution to a social problem; this are allowed to let a friend borrow it for their reduces incentives for future innovation and own enjoyment (the right of “first sale”); and gives no one the incentive to solve the piracy regardless of copyright, some uses — like “problem” at minimum social cost. copies for use in a school room (“fair use”) As the DCC report notes, the ultimate — are often legal. This balance has been built solutions to the problem of digital piracy are into law to reflect two facts: first, that the new business models. Just as player pianos incentives afforded to innovators do not have and radio expanded the market for music to be absolute in order to convey adequate and radio and television led to greater inter- incentives, and second, that once intellectual est in televised and broadcast sports, there is creations have been created, the public has a every reason to expect that digital technology strong interest in their dissemination. will expand the market for entertainment by The social value of a public domain, the reducing the cost of producing and dissemi- balance between imitators and innovators, nating it. Moreover, we must bear in mind and the historic deference given to the rights that these are the issues confronting the of first sale and fair use are of great impor- marketers of digital product, who are often not tance when considering what to do about the creators of it — the difference between a digital piracy. There can be no question that publishing house and an author. The publish- prosecuting those who break the law is both ing house is a business model for distributing valid and important, but many anti-piracy the author’s work — the economy depends proposals go much further than that. Many less on this specific manner of distribution of the proposals would require consumers to than it does the work of authors who provide add hardware or software to their computing the economy with creative input. devices that would add to cost and reduce The DCC’s recommendations are carefully interoperability regardless of the machine’s considered and should be given serious con- use. This would slow the use of digital tech- sideration. The moral issues raised by wide- nology and its contribution to long-term spread theft and the economic burden theft innovation. Moreover, many proposed out- imposes on some businesses are of great con- right prohibitions on access to digital materi- cern. But they are not sufficient cause to take al explicitly denies users the prerogatives they actions that could slow the rate of societal have traditionally enjoyed under the doc- innovation so crucial to long-term economic trines of first sale and fair use. Thus, the risk growth. in taking action on digital piracy is that we On behalf of CED and its Trustees, the make choices that move the finely crafted Research and Policy committee welcomes this historical balance away from the imitators contribution by the DCC to the debate.
ix EXECUTIVE SUMMARY
There has been an explosion in the popu- ongoing innovation. The DCC brings the per- larity of downloading and transmitting high- spective of the second innovator — the creator value digital content, triggered by the growth of new social value based on existing copy- of the Internet and the evolution of peer-to- righted works — to bear, noting that every peer systems. At the same time, there is a sub- creator owes a debt to what has come before. stantial disconnect between public attitudes For this reason, our intellectual property toward copyright and the letter of the law, systems are based on providing incentives to and growing concern among copyright-hold- both create new material and to make such ers over the erosion of their rights. The material open to the public for use for subse- National Academy of Sciences has identified quent creation. The report then discusses the phenomenon at the center of these devel- current proposals for legislative and regulato- opments and labeled it the “digital dilemma”: ry change, focusing on requests by the con- The same technologies that allow the cre- tent distribution industries for technical copy ation and manipulation of digital content (as protection mandates. Such mandates would well as its perfect reproduction and nearly have substantial effects on the information free distribution) can also be used to prevent technology and consumer electronics indus- access to digital content. tries in this country, on innovation, and on The result is a major policy debate the economic growth that stems from the between those who seek to protect their freedom to innovate. rights in digital content and those concerned These proposals were evaluated against about the public access to content that has the following questions: traditionally been guaranteed under copy- 1. How will these proposals affect right law. In this emerging digital world, innovation? what, if anything, should be done to ensure that authors, artists, songwriters, and musi- 2. How will these proposals affect the cians have adequate incentives to create con- growth of our high-tech economy? tent? And what, if anything, should be done 3. What impact will these proposals have to protect the public’s access rights, devel- on the broad range of information oped in the physical world, in order to thought of as the public domain? encourage innovation and dissemination and The DCC found that while digitization of to enhance the public domain? content is obviously changing the world’s eco- This report from the Digital Connections nomic landscape, there have been other dra- Council (DCC) of the Committee for matic technological breakthroughs in the Economic Development presents a different recent past that have profoundly changed view of this “digital dilemma.” Because of relationships among producers of content, CED’s mission to foster economic growth, the their distributors, and content users. DCC has focused on the economic impact of Introduction of the phonograph, radio, tele- copyright protection in the digital age and vision, and videocassette recorders have all the potential economic effects of proposals led to fundamental changes in content mar- for change. The report briefly explores the kets. But throughout these prior changes in history of copyright law, revealing that legal the world of physical distribution, copyright protection of the rights of creators has always law maintained its basic bargain: Society been explicitly balanced against protection of should provide incentives to creators and
1 PROMOTING INNOVATION AND ECONOMIC GROWTH
prevent wholesale appropriation of their 3. Existing solutions to the issue of unautho- work, while at the same time ensuring both rized uses, such as enforcement and edu- that subsequent creators can build upon a cation, should continue to be explored. creator’s work and that the public as a whole 4. We recognize the need for digital rights can have access to the creation. The DCC management (DRM) systems that will believes that this basic bargain should contin- allow creators to be rewarded for their ue to inform copyright law in the digital efforts. We are skeptical about govern- world in order to stimulate innovation and ment-mandated DRM, and we recommend enhance economic growth. Without this bar- that manufacturers not be required to gain in place, under-protection of works may build in mandated copy protection tech- inhibit initial creation, while over-protection nologies. But DRM systems provide a use- may inhibit “follow-on” innovation by the mil- ful “speed bump” for consumers by lions who come after the initial creator. inhibiting unauthorized uses of materials. Drawing on relevant economic and legal During this period of consensus building evidence, the Digital Connections Council of about “safety valves” in intellectual proper- the Committee for Economic Development is ty law, we encourage continued experi- making the following recommendations: mentation in private DRM systems. In par- 1. Because quick legislative or regulatory ticular, the capacity of such systems to solutions for the problem of digital copy- accommodate users’ rights traditionally right protection pose risks to innovation allowed under intellectual property law and economic growth and are likely to needs to be further explored so that the have unintended consequences in a period appropriate copyright balance can be of rapid technological change, we should maintained. If government-mandated sys- move slowly. Our first concern should be tems are proposed, they should be evaluat- to “do no harm.” We should dedicate the ed on the basis of their capability to main- next two years to attempting to build con- tain such a balance and their convenience sensus about the appropriate role in the for consumers. Consumers should play a digital age for traditional legal safety substantial role in evaluating and approv- valves that balance the exclusive rights of ing mandated technological protection creators in copyright regimes with users’ systems. rights. The DCC looks forward to facilitat- 5. Market-based economic tools that provide ing this national and international incentives for copyright-holders to facili- dialogue. tate follow-on innovation should be con- 2. The development and testing of new sidered —- including measures to provide business models for the distribution of earlier dedication of copyrighted materials creative content should be given the high- to the public domain. est priority by the content industries. We should not turn to law or regulation to protect any particular business model.
2 I. INTRODUCTION
Changes in technology, law, and business human creativity. But in the digital intangible practices have combined to create a perfect world we are increasingly being told that we storm that is raging around our societal con- are not a purchaser of a creative work but a ceptions of intellectual property. At the heart licensee of some segments of the intellectual of these changes is the shift from analog to property rights associated with that work. digital forms of information. Digital informa- Unlike the far-reaching rights associated with tion can be processed in an infinite variety of ownership of objects, licenses generally come ways, copied without degradation and at with a limited set of powers strictly deter- almost no cost, and can, over rapidly evolving mined by the holder of the intellectual prop- communications media such as the Internet, erty rights — and these rights are not only set be distributed virtually free to anybody and out in writing in licenses, but are also, everybody who is connected. Digitization plus increasingly, coded in software envelopes sur- the Internet thus enables the world at large rounding the content. to have access to more information than the We are moving from an analog world that greatest libraries in history ever possessed — allows resale of objects, once these objects and allows anyone to be a creator and a pub- have been distributed (so-called “first sale” lisher. rights), to a digital world that has the poten- But the blessings of digitization can be tial, through use of technology, to set strict seen as curses by copyright-owners. limits on what can be done with content that Digitization plus the Internet threatens to has been made publicly available. Where the deprive creators and distributors of control analog world default rule was “everything not over how and in what form their works are prohibited is permitted” (as a matter of reali- made available to the public, and of the ty, if not law), proposed architectures of tech- rewards that may flow from that control. nical control in the digital world allow the Directly connected to digitization is the operation of a very different default rule: trend of replacing physical objects such as “everything not permitted by the copyright- CDs, reels of film, magazines, or books with holder is prohibited.” nonphysical objects – intangible aggregations Digitization offers the possibility, at least in of bits that replicate the information con- the short term, of the most finely grained tained in the physical objects. We may have control over information that can be imag- shelves full of CDs, but we may also have hard ined. This has created what the National drives filled with bits that constitute copies of Academy of Sciences has labeled the “digital what are on those CDs or on CDs belonging dilemma.” As the Academy put it, digital tech- to our friends. Yet legal rules and many busi- nology has the “potential to demolish a care- ness models have been developed over the ful balancing of public good and private years based on the production and distribu- interest that has emerged from the evolution tion of physical objects rather than intangible of U.S. intellectual property law over the past goods. 200 years.” Technology, in short, has the Another change associated with this move potential to trump law. from tangible to intangible goods is the move In this new world, the nightmares of both from owning physical objects to licensing copyright-owners and of consumers are vivid: intangible goods. We are accustomed to buy- Copyright-owners see Napster-like technolo- ing recordings, books, even computer soft- gies and the Internet destroying their control ware CDs that serve as tangible expressions of and assert that rampant piracy is ruining
3 PROMOTING INNOVATION AND ECONOMIC GROWTH
them; consumers see proposals for locking The DCC started its work by reviewing the down information and worry about a world in economic underpinnings of copyright law. It which all information is pay-per-view. traced the evolution of copyright law from its The Digital Connections Council (DCC) constitutional foundation to the present. of the Committee for Economic Development Following the movement from “atoms” to believes that informed debate is critical to the “bits,” from analog to digital information, development of a balanced, coherent, and and from tangible to intangible goods, the enlightened intellectual property framework DCC saw profound impacts on both copy- that can survive the digital dilemma. The right-holders and users of information. It DCC is not made up of lawyers schooled in reviewed legislative, regulatory, and technical the fine points of intellectual property law proposals put forth by copyright-holders to jurisprudence. Nor is the DCC made up of solve the problems caused by the perfect representatives of any particular industry seg- storm, and attempted to understand and eval- ment, but has representatives from many dif- uate these proposals based on the economic ferent industries. The DCC consists of infor- growth-oriented mission of the Committee mation technology specialists committed to for Economic Development. Given this the development of policies that will enable unique perspective, the DCC sought answers our nation — and the world — to obtain the to three questions: benefits of economic growth and to harness 1. How will these proposals affect the potential of digitization for the good of innovation? society as a whole. 2. How will these proposals affect the The DCC began its examination of the growth of our high-tech economy? “digital dilemma” with the goal of determin- ing what intellectual property policies are 3. What impact will these proposals most likely to stimulate the innovation critical have on the broad range of inform to economic growth. As Chairman tion thought of as the public domain? Greenspan recently asked, If our objective is to maximize economic This report contains the Council’s findings. growth, are we striking the right balance in our protection of intellectual property rights? Are the protections sufficiently broad to encourage innovation but not so broad as to shut down follow-on innovation? Are such protections so vague that they produce uncertainties that raise risk premiums and the cost of capital? How appropriate is our current system—developed for a world in which physical assets predominated—for an economy in which value increasingly is embodied in ideas rather than tangible capital? 1
4 II. COPYRIGHT AND THE ECONOMICS OF INNOVATIONS
Copyright provides a creator with a achieving the goals of intellectual property monopoly over the distribution and sale of a law can be seen by asking a simple question: work for a limited time. Like any monopoly, it If an intellectual property regime successfully imposes costs on society. But our laws allow encouraged vast amounts of creative produc- the copyright monopoly to exist because it tion but none of this production was shared “provides a benefit to society by providing an beyond the creator, would the regime be con- incentive for the production of new creative sidered successful? Obviously, the answer works,” which often require substantial invest- would be “No.” ment in order to come into being.2 As a dis- Intellectual property law provides a way of tinguished group of economists recently told allocating the costs associated with creative the Supreme Court: activity to either the first innovator or to sub- To produce a new book, film, or other cre- sequent (or “follow-on”) innovators. Many ative work, an author must make a substan- recent calls for changes in copyright law have tial up-front investment. For the resulting focused on a perceived need for greater con- work to be profitable overall, the author trol by, and incentives for, the first creator. must recoup her initial investment through But progress in both science and art is incre- sale of the work to consumers. …. For prod- mental and, ultimately, cumulative. As Sir ucts generally, the second competitor who Isaac Newton wrote, “If I have seen far it is by wishes to bring the same product to market standing on the shoulders of giants.” In a dif- must incur the same kinds of costs as the ferent time, the band U2 echoed Newton: original entrant in order to participate in “Every artist is a cannibal and every poet is a the market. Books, films, and other creative thief.” works are different: without legal protection, The rights of, and the costs to, both the an author cannot prevent others from appro- first and subsequent innovators represent an priating the fruits of the original invest- † ment. Here, a second competitor can quickly inherent tradeoff. The structure of intellec- enter the market by simply copying the work tual property law will affect the costs of inno- and offering it for sale, without incurring vation borne by either the first innovator (the similar development costs. Without the abili- creator) or the second innovator (the individ- ty to exclude, entry may be quick and ual who benefits from the first work in creat- easy…and non-recovery of initial invest- ing something new for the world). It is impos- ment by the author is very likely.3 sible to maximize the incentives for both Thus, the incentives provided by copyright innovators concurrently. For example, if we protection are designed to encourage innova- decided to raise the costs of the second inno- tion by creators. A system that eliminated vator, we could extend all copyrights and incentives for creators, by allowing their devote substantial resources to enforcing works to be easily appropriated by others them. The likely result would be to raise the without recompense, would likely lead to a cost of producing new works by follow-on decline in innovation. But copyright law also takes into account † See Suzanne Scotchmer, “Standing on the Shoulders of the needs of users and subsequent innovators Giants: Cumulative Research and the Patent Law,” 5 J. Economic who benefit from access to the creator’s work. Perspectives 29 (1991); See also Suzanne Scotchmer and Jerry Green, “Novelty and Disclosure in Patent Law,” 21 Rand J. The importance of sharing acts of creation to Econ. 131 (1990).
5 PROMOTING INNOVATION AND ECONOMIC GROWTH
innovators and to reduce the number of such the first creator of the wheel to control all creations.4 On the other hand, if the costs are derivative uses of his or her invention. raised for the first innovator, by making copy- Copyright law balances protection of ini- rights and patents very limited in scope and tial creators with the importance of the com- duration, it is likely that the number of new petitive supply of follow-on innovation, and is works by this group will be reduced. The (or should be) cautious about providing con- question that we confront is: Which alloca- trol to the initial innovator that would allow tion of costs will create the greatest societal barring of subsequent innovators or control benefit? over the scope and direction of their innova- In weighing this question we must also tion. Such caution is important in the digital decide how much control over subsequent world, in which “improvements in the tech- creations we give to the first creator. If we nology of search and recombination continue believe that the first innovator has unrivalled to expand the economic importance of new knowledge of the innovation, we might be creation built upon old materials.”5 DCC persuaded that he or she is uniquely able to believes that for innovation to continue as the provide subsequent innovation from that engine for economic growth, the past cannot foundation. This would justify providing the be allowed to totally control the future. The first innovator with unlimited control over current public debate about copyright policy the innovation. But there is only one first for the digital age needs to continue to pro- innovator/creator, and innumerable poten- vide sufficient weight to the importance of tial second innovators. It seems likely that follow-on innovators — because every first among the many millions of potential follow- creator “stands on the shoulders of giants.” on innovators, at least one is likely to be able Ultimately, the balance to be struck is a to better build on the first innovator’s work. product of a societal decision. Even first cre- Why would this one area of human activity be ators cannot succeed in the absence of the exempt from our view that competitive rule of law. In return for the incentives that sources of supply — here, the supply of subse- the law provides, first creators have some obli- quent innovation — are preferable to gation to the society that enforces the rule of monopolies? Think of the wheel and the mil- law. Making first creators share their works is lions of inventions dependent on it — it the obligation that our society requires; this would have made no sense to have allowed obligation supports society as a whole.
6 III. THE DEVELOPMENT OF COPYRIGHT
If the goal is to find an appropriate, bal- arrived, it became clear that trying to control anced approach to copyright that recognizes copies of works once they were in general cir- the interests of both creators and follow-on culation was very difficult — and was less innovators (and other users) in a world effective than exerting control over the press- where perfect copies can be freely distrib- es themselves. For this reason, early royal dec- uted, it is useful to look at why copyright larations required printers to print their arose in the first place. The first phase of the names, cities, and date of publication on each copyright story covers the development of work to make it easier for the monarchy to early non-U.S. copyright statutes and U.S. locate the press responsible for a particular Constitutional approaches to copyright. work.† The Crown gave the group of printers A. ORIGINS OF COPYRIGHT known as the Stationers Company the exclu- sive right to own a printing press and printing Copyright began in England as a method tools, as well as the exclusive right to practice to obtain control over seditious publications. Before the development of the printing press, † See generally, Irah Donner, “The Copyright Clause of the the Crown maintained control over publica- U.S. Constitution: Why Did the Framers Include It With Unanimous Approval?” 36 Am. J. Legal History 361, 366-369 tion of ideas it did not like by punishing (1992); Paul Edward Geller, “Copyright History and the Future: authors directly and confiscating particularly What’s Culture Got To Do With It?” 47 J. Copyright Soc. of Am. heretical works. But when the printing press 209, 216-218 (2000).
LANDMARKS IN COPYRIGHT LAW
1709 The Statute of Anne is passed by the British Parliament to prevent monopolies in the printing trade and encourage the production and distribution of written works. 1787 Article I, Section 8, Clause 8, of the U.S. Constitution states that “the Congress shall have power…to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” 1790 The Copyright Act of 1790 is implemented by the First Congress, which granted American authors monopoly rights over their work for a period of fourteen years, with a possible renewal of another fourteen years. The term of copyright protection would later be extended to twenty-eight years in 1831. 1909 The U.S. Copyright Act is revised to expand copyright protection to all works of authorship, including music. 1976 The U.S. Copyright Act is revised again. The term of protection is extended to the life of the author plus 50 to 75 years. More importantly, the “first sale” and “fair use” doctrines are codified. The first sale exception, in Section 109(a), limits the distributional rights of the copyright holder to the first sale of each copy. The fair use affirmative defense to infringe- ment, found in Section 107, states that “the fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright.
7 PROMOTING INNOVATION AND ECONOMIC GROWTH
the “mistery or art” of printing. Interestingly, The Statute of Anne represented a change it also gave the Stationers Company the right — instead of the goal being censorship, the to enforce its monopoly by burning the books goal was now to provide a framework that and presses of its competition and imprison- would allow the printing industry as a whole ing anyone owning a press or found engaged to do well. And the crown and legislature in printing. wanted the printing industry to do well in The Stationers quickly agreed not to com- order to promote the free expression of pete with one another and established a regis- ideas, not because they were delighted with tration scheme for authorized copies. The the monopoly of printers. The Statute of rights of publishers remained perpetual Anne recognized that it took a good deal of under the Stationers’ rules. This was monop- money for printers to buy equipment and set olistic behavior, but it was encouraged by the up to print, and there needed to be incen- government in order to enable control of the tives to make printers willing to do so. press. Thus, as of the 1660s in England, all Without protection of the copyright, the printed materials needed to be licensed by printer would be foolish to invest the money Parliament and published by a member of to print new works that could then be quickly the Stationers Company. Every item printed undersold. Thus, this Act was designed to needed to have a title page giving the author, protect an overall societal interest in the cre- publisher, and place of publication. ation of new works, and to gradually elimi- But when censorship laws expired in 1694, nate the Stationers’ monopoly on the right to the copyright monopoly ended as well. The print.†† old monopolists suffered a great deal, and To this end, the Statute of Queen Anne finally managed in 1709 to get a version of granted a 21-year extension of the existing the previous system back into law.† This act, copyright monopoly of the Stationers the Copyright Act of 1709 (also known as the Company.6 By limiting the time of the copy- Statute of Queen Anne) was “An Act for the right monopoly, the Act created a “public Encouragement of Learning, by Vesting the domain” for works whose copyright had Copies of Printed Books in the Authors or expired. Purchasers of such Copies, during the Times therein mentioned.” It was intended to pre- B. THE RELUCTANT vent future monopolies of the printing trade, CONSTITUTIONAL GRANT by allowing anyone to print books, and was OF A MONOPOLY aimed at encouraging production and distri- bution of new works: The framers of the United States Whereas printers, booksellers, and other per- Constitution, suspicious of all monopolies to sons have of late frequently taken the liberty begin with, knew the history of copyright as a of printing, reprinting, and publishing, or tool of censorship and press control. They causing to be printed, reprinted, and pub- wanted to make sure that copyright was not lished, books and other writings, without the used for these purposes in the United States. consent of the authors or proprietors of such Article I, Section 8 of the Constitution is now books and writings, to their very great detri- known as the “Intellectual Property” or ment, and too often to the ruin of them and “Copyright Clause” and states: their families: for preventing therefore such The Congress shall have Power . . . To pro- practices for the future, and for the encour- mote the Progress of Science and useful Arts, agement of learned men to compose and by securing for limited Times to Authors write useful books. . . .
† See, Tyler Ochoa and Mark Rose, “The Anti-Monopoly †† See generally, Association of Research Libraries, (November Origins of the Patent and Copyright Clause,” 84 J. Patent and 2002), Timeline: A History of Copyright in the United States, Trademark Office Society 909, 914-918 (2002). available at
8 The Development of Copyright
and Inventors the exclusive Right to their cases, hold the copyright.†† Under U.S. law, respective Writings and Discoveries. corporate entities (“legal persons”) can have Limited rights are explicitly made avail- the same rights as human beings and can able in the Constitution only to “authors,” claim copyright in their own right. and the purpose of such rights is to promote the progress of the arts and sciences. This C. COPYRIGHT TODAY requires that works be accessible to the public In a nutshell, U.S. copyright law provides after the “limited” time has passed — when authors of original works with a bundle of they enter the public domain. The Framers five exclusive rights: (1) to reproduce the believed that a copyright monopoly was work in copies, (2) to make derivative works, worthwhile only if it encouraged the creation such as translations, (3) to distribute copies of work that would eventually fall into the to the public, (4) to perform the work pub- public domain to be shared by others. licly, and (5) to display the work publicly. (Of Thomas Jefferson (who was against all course, no copyright exists in government monopolies, including copyright) and James works, or in facts or data or ideas — only in Madison (who noted the benefits of a copy- the “expression” of facts or ideas.) These right monopoly in encouraging the develop- rights are provided for a limited period of ment of new works) engaged in an extensive time, and are subject to a complicated series debate as to whether or not the Constitution of limitations and exceptions. should include a provision that would allow † The “author’s” rights of exclusivity (which Congress to grant a “monopoly” power. But enable the author to charge for his/her/its even Madison clearly understood copyright as work) are balanced by “user” rights to make a monopoly granted only for a limited term 7 private uses of already-distributed content. to promote the arts and sciences. Thus, the For example, the so-called “first sale” doc- Constitution adopted the traditional English trine embodied in Section 109(a) of the idea of copyright as trade regulation to limit Copyright Act of 1976 provides that the copy- both the existence of monopoly and censor- right owner’s right to control distribution of ship powers of the publishing industry and copies only extends to the “first sale.” In the time-duration of this monopoly, thereby other words, the Copyright Act grants to creating a “public domain.” authors the exclusive right to distribute Over time in the U.S., copyright protec- copies of their work, but limits that right by tion has been extended to more types of distinguishing between ownership of a copy- works (including maps, charts, music, prints, right (the bundle of exclusive rights) and broadcasts, motion pictures, and software ownership of a copy (the tangible material in programs) and the length of protection has which a work is fixed), and by extinguishing been steadily extended (from an initial, the copyright owner’s distribution right after renewable term of 14 years to the current the first sale of each copy. This “first sale” term of life plus 70 years). U.S. acts uniformly doctrine is the basis for standard practices talk about the protection as being primarily such as used book markets, the local video for the benefit of the author — invoking the store, and even exchanges of copyrighted ≠ romantic vision of lonely creators in garrets works between friends and family. This first — and only benefiting the publisher as an assignee, but in reality the laws have clearly †† The MPAA has echoed this traditional sentiment by calling worked to benefit publishers, who in most its educational game about copyright law (designed for school- children) “Starving Artist.” Laura Holson, “Studios Moving to Block Piracy of Films Online,” The New York Times, September † See, Tyler Ochoa and Mark Rose, “The Anti-Monopoly 25, 2003. Origins of the Patent and Copyright Clause,” 84 J. PTOS 909, ≠ Commercial rental of software and phonorecords is prohibit- 925-927 (2002). ed under U.S. law because of the threat posed to these indus- tries by modern duplication technologies.
9 PROMOTING INNOVATION AND ECONOMIC GROWTH
sale doctrine has allowed the creation of text and, under present law, requires an after- libraries that provide access to copyrighted the-fact review of the circumstances. It does works to people who might not otherwise not lend itself to clear and precise rules; for have such access. A library can buy a single example, it is not clear whether sending an copy of a work and then loan it to dozens or entire copy of a film or song to a friend over hundreds of people, one at a time,† and, the Internet is a fair use or not. The fair use because of the first sale doctrine, such loans defense allows the public to use not only facts are not considered infringements of copy- and ideas contained in a copyrighted work, right. Although these loans might be seen as but also expression itself in certain circum- making it impossible for the publisher to stances, and affords considerable latitude for make additional sales, as all potential pur- scholarship and comment, even for parody. chasers are potential library patrons, we know that the creation of libraries did not kill the D. THE IMPORTANCE publishing industry in this country. Both OF THE PUBLIC DOMAIN authors and publishers have benefited from the broadly educated public that libraries The public domain is commonly under- encourage. stood to be the sphere in which contents are A second important exception to the free from intellectual property rights (Fair exclusive rights of authors, the “fair use” uses of content — like the noncommercial exception, allows a broad range of unregulat- private copying allowed in the Sony case dis- ed private uses of content, and, in legal cussed in the next section of this report — terms, provides an affirmative defense to are outside the public domain in theory, but have a similar impact in practice: providing charges of infringement. Codified at 17 †† U.S.C. Section 107, the defense provides: public access to information.) Overall, the “[T]he fair use of a copyrighted work, includ- digitization of content has had a positive ing such use by reproduction in copies . . . , impact on the size, effectiveness, and very for purposes such as criticism, comment, existence of the public domain. For example, news reporting, teaching (including multiple scientific data in digital form is much easier copies for classroom use), scholarship, or to share, combine, and use than paper-based research, is not an infringement of copy- information. And once such data is digital it right.” Courts weigh four broad non-exclusive can be shared globally via the Internet and factors in deciding whether a particular used as the basis for further experiments and infringement was “fair” or not: the purpose developments that increase the utility of the and nature of the use, the nature of the copy- public domain. righted work, the amount and substantiality Such openness can have direct human of use, and the impact on the market for the benefits. As Paul Uhlir, director of copyrighted work. “Fair use” depends on con- International Scientific & Technical
†† See, Pamela Samuelson, “Digital Information, Networks, and † Indeed, according to the American Library Association, The Public Domain,” 68 J.L. & Contemporary Probs, (2002) p. 82- “America’s libraries have long been among the nation’s largest 83: “Across the border from the public domain are several cate- volume-purchasers of copyrighted works. According to surveys gories of content that are widely enough usable that, for practi- published in 1998 by the National Center for Education cal purposes, they seem to be part of the public domain. This Statistics (U.S. Department of Education), the 8,891 U.S. pub- includes, importantly, much content that is protected by intel- lic library systems alone spent $789 million on library materials, lectual property law but is widely available to the public, as including electronic formats, in 1995. The 3,303 U.S. academic when it is posted on publicly accessible websites available to all libraries spent $1.3 billion on information resources in all for- comers without fee or apparent restrictions on use. Also out- mats in 1994. These libraries now spend well over $2 billion.” side the public domain in theory, but seemingly inside in Comments of the Library Association before The Library of effect, are such things as open source software; a penumbra of Congress, The United States Copyright Office and The privileged uses under fair use, experimental use, and other Department of Commerce, National Telecommunications and rules that permit unlicensed uses and sharing of information to Information Administration, Inquiry Regarding Sections 109 take place; and standards that are licensed without payment of and 117, Docket No. 000522150-0150-01, August 4, 2000. royalties.” (Internal citations omitted from quote.)
10 The Development of Copyright
Information Programs at the National fair use altogether or by passing a hypotheti- Academy of Sciences has said: “ ‘There’s a cal law excluding fair use of works authored general presupposition that public science by Republican Senators — of course that requires openness. Ultimately you need statute would be subject to First Amendment 11 access to the underlying facts and the sources review, and would almost certainly fail. for research in order to verify the research In the recent Eldred v. Ashcroft decision, findings that are published and to do further the Supreme Court recognized that copy- work — science builds on science. If you rights were not necessarily “categorically don’t have that kind of transparency and immune from challenges under the First access to that information, the system breaks Amendment,” but held that as long as down…’ Scientists used open databases and a Congress did not “alter[] the traditional con- collaborative model to combat SARS, and tours of copyright protection, further First “the lesson of SARS is that global security Amendment scrutiny is unnecessary.”† Thus, depends on allowing scientists to benefit any Congressional action that has the effect from a free flow of ideas and from the easy of substantially narrowing the public domain cooperation of experts from home and and/or eliminating fair use might be subject abroad.” 8 to First Amendment scrutiny. Access to information is also essential to A key value of the public domain is that it the functioning of a democracy. Information puts ideas into circulation by providing access is the necessary ingredient for the “uninhibit- to these thoughts to a wide variety of people. ed, robust, and wide-open” debate that The public domain is a modern invention, underlies the First Amendment’s guarantees.9 but it continues to enhance the movement Without access to information, it is impossi- begun as we changed from an artisan culture ble to imagine widespread public participa- (in which people deeply understood particu- tion in democratic processes. “[A] democracy lar processes but were unable to share these that involves wisely and collectively formulat- insights beyond their locality) to the age of ing attitudes, values, and conceptions of a Enlightenment and scientific understand- common good — as republicans believe — or ing— when broad sharing of local and partic- conceptions of a subgroup identity — as com- ularized insight allowed individuals to build plex democrats maintain — calls for a broad- generalized theories that could be tested sci- er range of information.” 10 entifically. The public domain is importantly one of In the U.S., there was a longtime presump- several “safety valves” that avoid conflict tion that published works were in the public between the First Amendment and copyright domain unless copyright was explicitly law: claimed. The reverse presumption operates Any law — copyright included — that is today, because no formalities are needed in implemented by telling anyone that there are order to claim copyright — copyright protec- some words or images that they may not tion is automatic, and you do not have to print, publish, or display publicly raises a write “Copyright 2003” on your work in order First Amendment question. When that law to claim rights in it. But it remains the case is copyright law, the prohibition is normally that ideas, methods, scientific principles, and permitted, and conflict with the First facts cannot be protected by copyright, and Amendment is generally avoided by safety thus are dedicated to the public domain valves internal to copyright law-like the upon their publication. Arguably, the idea/expression dichotomy, the fair use doc- trine, or copyright law’s placement of some † Eldred v. Ashcroft opinion. Justice Ginsburg, writing for the materials in the public domain. . . . . But if majority of the Court, noted that the copyright clause and the Congress passes a statute that undermines First Amendment “were adopted close in time. This proximity those safety valves — say, by eliminating indicated that, in the framers’ view, copyright’s limited monop- olies are compatible with free speech principles.”
11 PROMOTING INNOVATION AND ECONOMIC GROWTH
Internet enables innumerable forms of publi- every country, the surest basis of public cation, and allows the public domain to be happiness.” Ever since the founding of this more robust and vital than ever before. If nation, knowledge — its creation and diffu- access to facts and ideas (the unprotected sion — has been recognized as essential to underpinnings of copyrighted works) is the public good. For this reason, the copy- denied, the scope of the available public right statutes in this country are aimed not domain is inevitably narrowed. only at encouraging creation but also at mini- President George Washington said in his mizing monopolies, fostering learning, and message to Congress leading to enactment of increasing the knowledge of the people by the 1790 Copyright Act: “Knowledge is, in increasing their access to the information.
12 IV. COPYRIGHT BACKGROUND: SECOND PHASE
The first copyright laws came into being as the bugle.”)† 12 The machines that Sousa was a reaction to the invention of the printing referring to were the player piano and newly press, and the interaction between copyright emerging phonographic media. law and new technology has continued to be Sousa was worried not only about damage a source of friction and interest. New tech- to American music, but also about damage to nologies historically have challenged our sys- his business model. As a rule, Sousa kept all tem of protecting creative works through rights to his music. He was compensated, in copyright. Each new technology potentially part, through royalties based on the sale of requires a balance between providing the sheet music. Yet the makers of piano rolls or broader public with access to information phonographic discs needed to buy only one and creative works so that they can build on copy of a Sousa march, paying negligible roy- what has gone before, on the one hand, and alties, in order to pattern (“burn,” in our lexi- supporting the incentives for creation provid- con) a piano roll or disk. They could then ed by granting limited monopoly rights to copy the pattern endlessly and sell directly to creators, on the other. consumers who previously might have pur- chased sheet music.13 A. HOW DOES COPYRIGHT Sousa lost his legal battle in the Supreme INTERACT WITH NEW Court in 1908, but the Copyright Act of 1909 TECHNOLOGIES? provided that the makers of piano rolls and phonographic disks had to pay two cents to The copyright/technology issue did not the copyright-holder for every piano roll or first arise in reaction to Napster. While phonograph disk produced. The 1909 Act, in today’s perfect storm appears uniquely chal- effect, recognized the need to allow copy- lenging to the existing intellectual property right-holders to be rewarded for use of their legal regime, it is not the first time that tech- work — and led to the creation of institutions nological change has been seen as profound- like ASCAP to collect royalties on behalf of ly threatening. In 1906, John Philip Sousa authors. publicly bemoaned the future of American This pattern has been repeated time and music in words that still sound current: “I time again. Radio broadcasting carried with it foresee a marked deterioration in American the risk of local musical performances being music and musical taste, an interruption in superseded by national broadcasts produced the musical development of the country, and by a much more limited number of bands. a host of other injuries to music in its artistic Other live local events, like athletic contests, manifestation, by virtue — or rather, by vice were perceived to be at risk of disappearing — of the multiplication of the various music reproducing machines.” (According to Sousa, † See also, Oliver Read and Walter L. Welch, From Tin Foil to these machines would not only cause Stereo: Evolution of the Phonograph 175 (Howard W. Sams, 1959). American music to suffer, but would also In a strange echo of Sousa’s comment, in 1996 ASCAP cause a mother to “cease to croon her baby to informed summer camps nationwide that they had to pay license fees to use any of the four million copyrighted songs sleep with sweet lullabys (sic),” He feared that written or published by ASCAP members. After a (predictable) bands would be “doomed to vanish,” singing public relations disaster, ASCAP retreated. James V. DeLong, “ASCAP v. Girl Scouts: The Best Things in Life Aren’t Free, or, around the campfire would end, and “never Why You Might Be Better Off If You Wind Up Paying for Those again will the soldier hear the defiant call of Campfire Singalongs,” National Law Journal, March 10, 1997.
13 PROMOTING INNOVATION AND ECONOMIC GROWTH
because potential attendees would stay in anti-piracy schemes lacked the flexibility, ease their living rooms, cocooned in front of the of use, and inexpensive distribution that radio console. would make them attractive to manufacturers But new business arrangements evolved. and end users, particularly in a networked At first, bands played on the air for free in environment. Essentially, dongles and other order to gain exposure for their live perform- first-generation physical DRM efforts often ances. Then, seeing that radio stations were made computers crash — and did not actual- profiting, in part, from the fruits of their ly stop copying.† labor, they fought to be paid both directly Now, software is often distributed and and through royalties based on the radio air- licensed to the end user online. Many soft- ing of their recorded work. Live broadcasts ware publishers rely on their license agree- from opera houses, concert halls, baseball sta- ments for legal protection of their copyrights diums, and dance palaces were, in and of in order to take advantage of the new oppor- themselves, advertisements for the venues, a tunities for cheap, flexible and direct software means of increasing the fan base, and a distribution. The business software industry, mechanism for stimulating sales of associated products such as clothing and fan magazines. † Direct impacts of DRM, like dongles, can include difficulty in simply using the product, and expense passed on to the con- The history of computer software protec- sumer; indirect impacts can include hard-to-quantify public tion provides a more recent example of inter- relations negatives, such as engendering suspicion or otherwise alienating potential customers. See, Section VI(D)(1)(e) infra. action between copyright and new technology Intuit’s product activation software for TurboTax, discontinued in this second phase. In the 1980s, the soft- by Intuit in May 2003 in response to a backlash from its cus- ware industry used hardware locks, such as tomers, is the modern software equivalent of the dongle. See, Mark Hachman, “Intuit Will Discontinue Product Activation,” key disks and dongles, to prevent unautho- ExtremeTech, May 14, 2003, available at
THE STORY OF THE “DONGLE”
Many mid-1980s software programs (such as Lotus 1-2-3 and Symphony) were protected from unauthorized use by a disk system. In order to run the program, a “key disk” had to be placed in the user’s floppy disk drive. The idea was that key disks would not be (or could not be) duplicated by users, and so it would be impossible to use the software on more than one machine. Before long, however, software that unlocked these key disks was widely available. Most of the large software pub- lishers stopped using the key disk. A more secure system for early software protection involved the use of “dongles” — devices that attach to a computer’s ports. These devices were expensive to manufacture and maintain, and caused problems for users (imagine running several programs at once, each requiring its own dongle). As with key disks, dongles could be spoofed or copied. For its time, the dongle was the most sophisticat- ed device around for protecting against software piracy. But the software industry wound up aban- doning dongles because the companies that made products without dongles could charge more and still sell more copies. The dongle story reminds us how difficult it is to copy-protect content in a way that will not degrade performance or otherwise defy end-user expectations. Software users may have expected that they would be able to use software that they had paid for on different machines throughout their homes or offices, but the dongle made such use difficult. The dongle story provides another useful economic lesson. Consumers will pay more for a prod- uct that provides them more capabilities or more “user” rights. And more attractive products, those that provide more rights or capabilities, will triumph in the marketplace, in the absence of a legal regime that prevents them from being offered.
14 Copyright Background: Second Phase
for example, has assumed some level of un- † In a June 2002 report, the Business Software Alliance estimat- authorized copying (at times, as much as 40 ed that the worldwide rate of software piracy in 2001 was percent) and has moved forward, working approximately 40%. BSA Global Piracy Study, available at
THE STORY OF THE VCR
Today’s VCR began as a bulky and expensive analog recording device the development of which, by legend, was partly funded by Bing Crosby — who wanted a high quality recorder to tape his per- formances so that he would not be held captive to live broadcast schedules.(a) Eventually, as with so many other technologies, it became smaller and cheaper and successfully entered the consumer market. As this occurred, Motion Picture Association of America (MPAA) President Jack Valenti told the House Judiciary committee that “the growing and dangerous intrusion of this new technology” threatened his entire industry’s “economic vitality and future security.” The MPAA and its member companies were worried enough to use litigation to attempt to shut down the VCR industry. In the 1970s, Universal City Studios and Disney sued Sony for contributory copyright infringement for making (and selling) Betamax VCRs. The studios argued that Sony’s machines materially contributed to unauthorized copying of protected works — in this case, televi- sion programs. They maintained that such copying was not “fair use” because it was “nontransforma- tive” — no new works were being created by users, who were merely copying the works wholesale for their own purposes. The studios also pointed out that the entire work was copied by the user. (The amount of the work copied is a key factor in fair use analysis.) Because Sony knew or should have known that these private infringements were taking place, it was (so the studios said) a contributory infringer. In 1984, the Supreme Court heard the case and ruled that Sony’s actions did not constitute contributory infringement because the VCRs were capable of substantial non-infringing uses. More importantly for purposes of this report, however, the Court found that it was “fair use” for users to make private, noncommercial copies for time-shifting purposes. The Sony decision has created a powerful presumption that private noncommercial copying of content is fair. Beyond its legal implications, the Sony decision, and the experience of users with copy-protected software (and, indeed, software in general) has created a consumer expectation that noncommercial copying for backup purposes, or to time-shift or space-shift (to use at a different time or in a different device), is acceptable. The VCR story illustrates how consumer expectations about a technology develop. Most con- sumers now expect that they can make a personal copy of software in order to have a backup or for time- or space-shifting purposes. Polls show that many people do not consider such copying wrong or believe that personal copying (as opposed to commercial copying) has a real impact on copyright owners.
(a.) Investing Opportunities in Digital Media, Raymond James & Associates, February 10, 2002.
15 PROMOTING INNOVATION AND ECONOMIC GROWTH
follow-on revenues for value-added services, a livelihood based on sales of recordings of particularly upgrades and support that users their performances through the present dis- need. The business model that the software tribution system. industry subsequently developed demon- Royalties paid to the band by its label, the strates the utility of making available relatively source of direct income from the sale of CDs, lower-cost products to establish a presence in are based on retail (or wholesale) sales, rang- the marketplace (and to compete with free ing from approximately 9-22 percent of retail unauthorized copies) in order to lay the sales (more often 13-18 percent).† (They also foundation for associated revenues from depend on the status and bargaining power value-added services. of the group — whether they are new, fairly A lesson that might be drawn from these established, or highly successful).14 These stories is the importance of flexibility when rates may be increased over the course of the the Schumpeterian “winds of creative destruc- band’s career if its contract is renewed and tion” blow. New business arrangements have may be reduced over the life of a CD as it consistently emerged in response to new goes from initial release (“front list”) to back technologies. Over the long term, the cre- list with a reduced price.15 These royalty per- ators of advances in science and the arts have centages, by themselves, would make royalties profited from advances in new production among the most significant costs in the pro- and distribution technologies. And attempts duction and sale of a CD, and potentially to protect existing production and distribu- create a substantial flow of funds to the most tion arrangements by law have failed. successful artists. But that turns out not to be the case. B. THE STRENGTH OF Many artists receive an advance from the FINANCIAL INCENTIVES label upon signing a recording contract. These advances, in theory, are to be recouped During the first and second phases of the by the label from the flow of funds generated copyright story, the debate about intellectual for the artist’s royalties. If, for example, a property policy was couched in terms of band were given a $1 million advance, the incentives for those who create new works — first million of royalties due to the artist authors, songwriters, artists, and performers. would be recouped by the label. And, if the Yet because the distributors of these works band does not generate $1 million in royal- collect steep rents (in economic terms) from ties, standard contracts do not permit the creators in exchange for distributing these company to get back the balance of the works, and because it is so difficult for a cre- advance (known as the “artist’s deficit”). So ator to be “heard” without the aid of a the record company bears the risk of not largescale distributor, most creators receive earning back the advance — a considerable only a small percentage of the funds that risk because, according to the industry, only their works generate. Only a tiny percentage three out of ten CDs are actually successful of creators achieve the great financial rewards and only one out of ten makes a significant that we assume accompany celebrity. profit.†† For example, bands that record a CD for a major label are unlikely to receive substantial † See, Merrill Lynch, Global Securities Research and rewards, even for CDs that sell well. Their Economics Group, Global Fundamental Equity Research financial incentives to record more music Department, “Music Industry: Can Majors Control Online (based on royalty income) are likely to be Growth?” (November 2001) p.96, available at < http://www.stern.nyu.edu/mgt/courses/b2101/lamb/down- attenuated, but having a recording marketed load/music_industry_merril_lynch.pdf> by a major label recording may be important for developing a fan base and building a per- †† Raymond James Report. The recording company may provide that any artist’s deficit be recouped from royalties formance career. Few bands, in fact, can earn from any subsequent CD released under the contract.
16 Copyright Background: Second Phase
But the story does not end with the band This income might be supplemented by addi- receiving its $1 million advance and the label tional royalties if the band wrote the songs recouping the royalties. Royalties are not the and kept the copyrights, or from royalties only costs that the recording company can paid from broadcast performances of the recoup. Charged against the advance are music or its inclusion in other media — but it costs of recording, including equipment would also have to cover the costs for the rental and travel, a substantial percentage band’s management, legal fees, and other (often 25 percent) of the cost of producing costs. Based on the numbers, it is difficult to videos used in marketing the CD, other pro- argue that the artists’ principal incentive to motional expenses paid on behalf of the create is the financial return from artist, and expenses associated with touring to recordings.† The distributors, as opposed to market the work.16 the artists, are commonly the main direct In an examination of the flow of funds in beneficiaries of these particular copyright a relatively large CD sale, Merrill Lynch esti- protections. mated that if a company sold 500,000 copies of a CD at approximately $16 per copy (retail), actual royalties paid to the artist over † In 2002, on average, the top ten rock groups (Paul McCartney, the Rolling Stones, etc.) received only 17% of his advance would amount to approximately their income from recording, and 66% of their income from $88,000 out of gross revenues of $8,000,000.17 touring. Richard E. Howard, ATT.
Figure 1 Figure 2 CD Cost Breakdown (Retail Price) Music Publishing Revenue by Type 1999 (%)
Administration Other Marketing 8% Distribution 5% 8% Profit 11% 5% A&R 8% Synchronisation VAT 17.5% 10% 14% Distribution 6%
Manufacturing 6% Performance Mechanical 45% Mechanical Retail 29% Royalties to Mark-Up Music 27% Publishers Royalties to 6% Recording Artists 13%
SOURCE: Merrill Lynch, Raymond James. SOURCE: Merrill Lynch, Raymond James.
17 PROMOTING INNOVATION AND ECONOMIC GROWTH
V. COPYRIGHT BACKGROUND: THIRD PHASE
With the VCR and dongle era behind us, and shipping books militated against easy or we are entering a third phase of the copyright widespread piracy. And the economic costs of story. This phase is characterized by the rise the leakage were sufficiently limited that dis- of electronic networks, the digitization of tributors did not feel directly threatened. content, and the prevalence of licensing mod- Now, in the digital era, the friction and els (as compared to ownership of creative cost that were involved in copying physical objects) for the distribution of digital goods. content-goods no longer are limiting factors. Digitization plus compression plus high band- All a person has to do now is save a file to a width equals, in the eyes of investors in publicly accessible folder on his or her hard expensive proprietary content (normally drive, where it can be redistributed to other those who distribute rather than create such users via peer-to-peer file sharing services. Or content), a nightmare scenario: simply mak- that person can email the file as an attach- ing available a work in digital form may guar- ment to a message sent to many people. Or antee that someone can make a copy of it that person can upload the file to a personal and give it to a friend or share it with web page and make it visible to the world. 200,000,000 buddies they have never met. The capability of the Internet to allow world- At the same time, user expectations about wide, instantaneous, cost-free distribution of what was reasonable under intellectual prop- perfect, non-degradeable copies makes the erty law evolved during the second phase. digital world frightening to owners of high- Millions of people now are used to time-shift- investment content. At the same time, such ing and space-shifting: taping shows or burn- copyright-owners are deeply aware of the dis- ing CDs so that they can take their music with tribution benefits the Internet may provide, them and play it on whatever playback unit is as long as they are able to maintain control available. These second-phase user expecta- over their works. tions have survived the introduction of third- It is becoming clearer to many that intel- phase technologies, and copyright owners are lectual property may be as different from real justifiably worried. property as intangible objects are different from tangible objects. As Chairman A. THE CHALLENGE OF THE Greenspan recently said, THIRD PHASE [T]he nature of intellectual property is In an era of physical distribution of con- importantly different from physical property. tent “objects” (such as books, movies, and In particular, one individual’s use of an music saved on physical media), creators (or idea does not make that idea unavailable to other rights-holders) could divide the bundle others for their own, simultaneous use. Further-more, new ideas almost invariably of intellectual property rights both geographi- build on old ideas in ways that are difficult cally and temporally with some assurance that or impossible to delineate. From an economic the divisions would be meaningful. Thus, the perspective, this provides a rationale for release of a book in Germany would not nec- making the calculus, developed initially by essarily dictate that copies would “leak” into Leibnitz and Newton, freely available, the U.S. in great numbers. The physical diffi- despite the fact that those insights have culty and cost involved in copying, crating, immeasurably increased wealth over the
18 Copyright Background: Third Phase
generations. Should we have protected their claim in the same way that we do for owners “The industry would not be able to of land? Or should the law make their produce and market the number of new insights more freely available to those who artists it’s offered historically. It would would build on them, with the aim of maxi- mean far less investment in music. Record mizing the wealth of the society as a whole? companies make money by selling music…If they can’t sell music because Are all property rights inalienable, or must people are downloading or burning it for they conform to a reality that conditions free, they’ll take fewer risks on fewer them? 18 artists.”
But how to acknowledge this difference Cary Sherman, President of the Recording between property and intellectual property, Industry Association of America and what this difference means for copyright policy, is a hard problem. As with the devel- opment of the printing press so many years There are now over 130 different P2P pro- ago, a new means of storing, displaying and grams. The majority of the files downloaded distributing information (or knowledge) is are MP3 music files. According to the becoming widespread: digitization. Now, in research firm The Yankee Group, about five the Internet age, the content industry sees billion music files were downloaded in 2002.19 digitization accompanied by the threat of But P2P users are also swapping files of “Napsterization.” movies, television shows, and video games. The idea of Napster came from its creator About five million video games were down- Shawn Fanning in 1998. Mr. Fanning, while loaded in 2002, and about three million tele- still an undergraduate at Northeastern vision shows are downloaded each day from University, created programs that permitted KaZaa alone.† 20 people to locate and transfer files in real time The music industry argues that it has been — something that traditional search engines grievously hurt by the widespread online shar- did not allow — and to log on and update ing of audio files, first by way of Napster and lists of MP3 (compressed music) files. By May then via Napster’s more decentralized proge- 1999, Mr. Fanning’s idea developed into a ny. The most telling statistic is the decline, full-blown operation and an incorporated over the last three years, of music sales: a 5 entity, Napster Inc., which allowed users to percent drop in 2000 and 2001, and a further swap music with each other by using a search 7 percent drop in 2002.†† 21 According to the option that found the songs requested and industry, these declines, the first in two then allowed downloads from other users at decades of uninterrupted growth, can be no cost. Napster’s popularity grew quickly. attributed in part to the enormous increase The music industry successfully prosecut- in file- sharing, imperiling the industry and ed Napster — and because the Napster serv- foreshadowing a future marked by less and ice had become a centralized, incorporated less creation, the successful emergence of entity with proprietary software, it was an easy target. Napster was ordered to prevent its † On December 19, 2003, the Supreme Court of the users from sharing tunes without paying the Netherlands upheld a lower court’s ruling that Kazaa’s creators copyright-holders. When Napster was eventu- could not be held liable for the infringing actions of Kazaa’s users. Joris Evers, “Dutch Supreme Court Rules Kazaa Legal,” ally disabled, people were forced to move December 19, 2003, available at their music file-sharing to more sophisticated
19 PROMOTING INNOVATION AND ECONOMIC GROWTH
fewer and fewer artists, and a precipitous Figure 3 reduction in the music available to us all. A closer look at the state of the music World Music Sales ($bn) 1969-2000 industry supports the view that offline piracy Emergence of Free P2P File — the massive copying of the physical media 45 – in which form most listeners receive recorded Transfer music — and online file-sharing of copyright- 40 – ed material have damaged the financial per- Traditional formance of the industry. According to 35 – Music Sales Merrill Lynch, CD burning and ripping are Mature serious threats. Physical piracy, however, 30 – accounts for losses of approximately 10 per- 25– cent of revenues of the music recording market and roughly a third of the total in 20– unit sales.22 Other factors have also contributed sub- 15 – CD Format Introduced stantially. Over the last two decades there have been several periods of decline or 10 – stagnant growth in this fundamentally cyclic 5 – Global Economic industry — not surprisingly (for the sale of Downturn discretionary products) correlated with bad 0 –– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – † economic conditions. 1969 1975 1981 1984 1990 1996 In the period from 1980-1984, the music market contracted at a compounded annual SOURCE: Merrill Lynch, Music Industry: Can Majors Control growth rate of -4.1 percent due, according to Online Growth?, Comment, RC#30231317 Merrill Lynch, to a recession and to copying associated with music on audiotapes.†† 1985- 1995 was another period of strong growth, was another stagnant period, with a 1.5 per- similar to the period between 1969-1979, cent compounded annual growth rate decline both of which were marked by growth stimu- (although the strong dollar affected these lated by new distribution media — first of results and there was a slight increase in local 24 cassette players, then CD players.23 1995-2000 currencies). The recessionary effects of the early 1990s were masked by strong CD revenues resulting from the replacement of † Overall, the evidence is mixed with respect to the impact of downloading on record label sales. On July 9, 2003, Claire vinyl libraries. This changeout has largely Smith of The Scotsman reported, “Far from damaging the occurred and is no longer stimulating sales.25 music industry, downloading music from the Internet can be a Other factors appear to be playing a part useful and significant marketing tool.” On November 4, 2002, Amy Harmon of the New York Times reported that independ- in recent revenue declines experienced by ent bands were experimenting with promoting their wares on the music industry. The consolidation of own- file-trading services, and that “an executive at a major record company said that he and many colleagues would like to use ership of radio outlets and the increasing [a free file-sharing service] to distribute their material but that importance of mass market retailers (as their lawyers would not allow it.” Reuters reported on June 15, opposed to specialty stores), who have dou- 2003 that Sony Music had decided not to make downloads available for sale to European Internet users — but would sell bled their share of the market, has led to a downloads in Britain, “making it the last among the major smaller number of artists receiving air play recording labels to join Europe’s music download bandwagon.” and having their materials available to a mass 26 †† Raymond James Report. Chart reflects dollars adjusted for audience. The industry significantly reduced inflation. the number of new releases from 38,900 in
20 Copyright Background: Third Phase
1999 to between 27,000 and 31,000 in 2001 industry has taken the experience of — a 20-25 percent drop.† Cyclical changes in Napsterization to heart. As the MPAA has musical tastes also seem to have had an stated: impact. Even prior to Napster, the industry While the Internet and Broadband services was experiencing a substantial decline in have great potential, they can also cause 1995-2000 sales to 14-19 year-olds, traditional- enormous losses and damage to consumers, ly its highest-spending group.27 In addition, telecommunications services, and the compa- during the boom years of the 1990s the nies that produce and distribute content for industry continued to raise prices, with the those businesses. Audiovisual work piracy average CD increasing in cost from approxi- and cable theft have always been problemat- mately $12 to $15.28 This overall price ic; however, the digital world is far more dangerous than the analog world. increase may well have affected sales as the U.S. entered an economic downturn — In the digital world, pirates can download indeed, the industry has continued to raise everything from USA Networks’ original pro- prices in the 2000s.†† Another factor may have gram to episodes of “Jerry Seinfeld” for their been fierce competition for the discretionary own use or to provide to countless others. consumer entertainment dollar: DVD sales Moreover, the 1,000th copy of a digitized movie or television program is as pure as the rose by 61 percent in 2002, and video games original, whereas in analog each copy is are competing directly for the attention of ≠ 29 degraded in quality. Thus with a single key- the crucial 14-19 year old purchaser. stroke, a computer pirate can do millions of Whatever the causes of the decline in dollars worth of damage to the potential the music distribution business, the movie market for television programming or motion pictures, whether or not the pirate makes a † See BusinessWeek.com article: “The industry released 27,000 nickel from this effort. No one will pay for new titles in 2001, according to a speech made by an RIAA offi- cable television or movies when they are cial, a 25% drop from the high of 38,900 in 1999. The RIAA available for free on the Internet. ...30 disputes Ziemann’s analysis, saying it hasn’t released an official tally of annual new releases since 1999. Industry-research firm But in contrast to the recording industry, Nielsen SoundScan has run the numbers, however, and the which has recorded three consecutive years of RIAA doesn’t dispute its findings. According to SoundScan, new releases in 2001 totaled around 31,734, still a 20.3% drop.” declining sales, the movie business continues Releases rose to 33,443 in 2002, but that’s still 14% below the to grow. While the MPAA points to millions of 1999 record. “The music industry’s [modus operandi] is to throw things against the wall and see what sticks,” says Nathan downloads of a new movie release, even Brackett, senior editor at Rolling Stone. “If they’re throwing before its official opening, movie box office 20% less stuff out there, there’s less chance something will receipts grew 13.5 percent in 2002 — the best stick.” See also, Stan Liebowitz, “Will MP3 Downloads Annihilate the Recording Industry? The Evidence So Far,” year-over-year performance in two decades. June 2003 (concluding that MP3 downloads cannot be blamed Growth in other media used for movie distri- for all of the drop in unit sales the muic industry has experi- bution was also dramatic. And revenues from enced; decline in sales of CD singles and cassettes, which has continued in the past three years, began long before Napster), videocassettes, the technology that was to available at have threatened the very security of the
21 PROMOTING INNOVATION AND ECONOMIC GROWTH
But the MPAA is correct in seeing a pro- lishers realize that they are not worth the found threat to its present forms of distribu- “lock-down” benefit. A second answer is the tion. The costs of production for creative VCR approach — finding legal means of lock- works (particularly extraordinarily costly ing down the machines that facilitate access works, like movies) are likely to remain high, to the content. But such legalistic approaches while the marginal cost of copying and dis- may not work if there are good (“substantially tributing digital versions of these works may noninfringing”) uses for the machine in ques- someday become very low. As Alan tion, as in the Sony case, or if some inventive Greenspan recently pronounced: technologist finds a way around the legally [I]n the physical world, the usual situation mandated solution. is that each additional unit of output is A variety of steps (both of the “dongle” more costly to produce than the previous one; and “VCR” variety) have been proposed over that is, production, at least eventually, is the last few years that have been intended to characterized by increasing marginal cost. combat the perceived threat of online copy- By contrast, in the conceptual world, much right infringement: of production is characterized by constant, • major Congressional legislative and perhaps even zero, marginal cost. For initiatives; example, though the set up cost of creating an on-line encyclopedia may be enormous, •a proceeding before the FCC to deter- the cost of reproduction and distribution mine whether broadcast television may be near zero if the means of distribution receivers and other devices capable of is the Internet.31 providing access to video signals should Clearly the movie distribution industry’s respond to a “broadcast flag” by pre- future contains many of the same challenges venting retransmission of “flagged” material over the Internet; faced by the music distribution industry. Whatever the true impacts of the move- ment to digitization and the growth of com- puterized networks, it is beyond question that DIGITAL RIGHTS MANAGEMENT those industries that have relied on the physi- cal distribution of copyrighted materials — Digital Rights Management (DRM) refers to technologies and services that allow digital previously in analog form, and now in digital content providers to regulate the use of — believe they have a critical problem that copy-protected products, such as photo- must be attacked on all fronts, domestic and graphs, books, music, and videos. DRM international, legislative and regulatory, systems often use encryption to restrict through education, standard setting, and liti- access to digital content to authorized users. gation. Additionally, some DRM systems enable con- tent providers to monitor the activity of the authorized user via electronic “marking” B. WHAT ARE THE PROPOSED devices to prevent altering, copying, or shar- SOLUTIONS FOR THE ing of content on different machines. DRM technologies may be embedded in the soft- THIRD PHASE? ware of digital content or the hardware of a The advent of any new technology (like device. the advent of the printing press, photocopy- DRM technologies give content providers ing machine, and VCR) presents a profound more control over their intellectual property challenge to rights-holders. One answer is the assets. By controlling file access and distribu- “dongle” approach — finding technical tion, content providers can sell (collect pay- ments for) more units of digital copy-protect- means of locking content down. Such techni- ed material by preventing unauthorized cal approaches often have such undesirable duplication. direct and indirect impacts on users that pub-
22 Copyright Background: Third Phase
• ratification by the FCC of an agree- The next sections of this report examine ment between the cable industry and the various approaches (legislative, regulato- the movie studios; ry, and contractual) that have been proposed •creation of digital rights management or implemented. We will look at the impact protections; and on innovation of each of these approaches, and their relationship to the current societal •initiation of cross-industry groups balance between control and access to infor- studying the question of online copy- right infringement and making recom- mation, as well as to consumer expectations mendations for copy protection tech- that have arisen over the last two decades. nologies.
23 PROMOTING INNOVATION AND ECONOMIC GROWTH
VI. DISCUSSION OF “SOLUTIONS” FOR DIGITAL COPYRIGHT INFRINGEMENT
Significantly, the DMCA has another ele- A. LEGISLATION ment that addresses directly the risk that the 1. The DMCA law would be read to mandate certain techni- cal protection measures for a broad range of Any discussion of legislative activity begins devices. The Act states that manufacturers of with the Digital Millennium Copyright Act computers and consumer electronics prod- (DMCA), enacted into law in 1998 “to make ucts have no obligation to ensure that their digital networks safe places to disseminate devices respond to particular copy protection 32 and exploit copyrighted materials.” The technical measures (Section 1201(c)).†† This DMCA set the stage for efforts to protect digi- key section of the DMCA is known as the “no tal information from unauthorized copying tech mandate” clause. by recognizing that copyright-holders might The DMCA has several other components employ technological protection measures to that were the result of extended debate over control access to their works. Section the responsibilities of third parties who might 1201(a)(1)(A) of the Act outlaws circumven- be involved in unauthorized access to and tion of “effective” technical measures used by distribution of copyrighted materials. copyright owners to protect access to their Traditionally, companies that provided † works (subject to a few exceptions). The Act telecommunications services did so as “com- also includes provisions making it illegal to mon carriers,” transmitting all communica- “make, import, offer to the public, provide or tions presented to them, without liability for otherwise traffic in technologies that bypass the content of the materials that carried. The access controls” (Section 1201(a)(2)), or to new question answered by the DMCA was make technologies that bypass “other techni- how copyright law would treat the category of cal protection measures” used by copyright- companies that provided access to the owners to protect a right in their works Internet (online service providers) or that (Section 1201(b)(1)). hosted web pages that could be accessed via the Internet — who, under classic copyright † According to the Home Recording Rights Coalition, “The law, would be liable for copyright infringe- legislative history of the DMCA indicates that Congress intend- ment for passive “copying” of protected con- ed to require minimum attributes for measures to be deemed “effective,” and thus to trigger DMCA obligations. On the occa- tent. Under the DMCA, companies acting as sion of initial passage of the DMCA by the House of “mere conduits” (e.g., facilitating email Representatives, Chairman Tom Bliley, on behalf of the House exchanges) have essentially no liability for Commerce Committee, addressed the meaning of “effectively protects” in the context of section 1201(b): ‘Section infringements originated by subscribers. 1201(b)(2) of H.R. 2281 defines important phrases, including Companies providing “hosting” services for when a protection measure “effectively protects a right of a sites they do not control will also not be sub- copyright owner under title 17, United States Code.” In our view, the measures that would be deemed to “effectively” pro- ject to copyright infringement liability if they tect such rights would be those based on encryption, scram- bling, authentication, or some other measure which requires the use of a “key” to copy a work.’” Congressional Record, †† The Act does feature a mandate for manufacturers of VCRs 105th Congress, August 4, 1998, H7094. Home Recording to use Macrovision (which prevents VCR-to-VCR copying) in Rights Coalition, “When Is A “Technological Measure” their devices (Section 1201(K)), but that is a narrow agreement “Effective” And When Is Compliance Mandated?” available at with respect to analog technology that was specifically agreed to
24 Discussion of “Solutions” for Digital Copyright Infringement
cooperate with a detailed process set forth in As part of recent attempts to prevent the DMCA by which rights holders notify unauthorized access and distribution of copy- them of infringements and they take down righted materials, attempts are being made the offending site. Operators of websites to pass legislation at the state level. (individuals actually and actively responsible Proponents claim that the legislation will for content on these sites) remain subject to update the DMCA to help combat digital normal liability under existing copyright law. piracy and that new “criminal and civil penal- For the purposes of this report, the most ties against Internet pirates and hackers of important sections of the Act are the anti- communications services” at the state level circumvention provisions. The Act prohibits are “an essential tool to complement the manufacture or distribution of any prod- resource-limited activity at the federal uct or service that is primarily designed or level.”33 While the proposed legislation large- produced for the purpose of circumventing a ly duplicates the DMCA, it omits key excep- technological measure that controls access to tions and limitations inserted by Congress to a copyrighted work, and prohibits the manu- permit legitimate activities such as circum- facture or distribution of any product or vention for particular purposes — encryption service that is primarily designed or produced research, security testing, and interoperabil- for the purpose of circumventing protection ity — as well as the explicit disavowal of a afforded by a technological measure that generalized tech mandate discussed above. effectively protects a right of a copyright By excluding these limitations, the proposed owner. state legislation strikes a very different bal- But the DMCA provides some exceptions ance than that found in the DMCA, and may to these sweeping provisions. For example, harm technology companies, universities, the DMCA permits the act of circumvention libraries, and users. Additionally, although and circumvention devices for critical activi- these proposed (and in some cases, enacted) ties such as achieving interoperability, encryp- tion research, and security testing. The state bills are described as “theft of service” DMCA also establishes a rulemaking proceed- legislation, they would potentially subject ing under which the Library of Congress can consumers and manufacturers to criminal establish additional exceptions upon finding penalties and fines for attaching to their that users of a particular class of copyrighted broadband connections otherwise lawful works are likely to be adversely affected by devices (e.g., TiVos) that have not been their inability to make noninfringing uses of “approved” by the broadband service the works. A critical question for those who provider — who might be offering a compet- care about the public domain is the relation- ing device. Under these bills, liability could ship among the provisions that criminalize be found based on a subjective “intent to attempts to gain access to material protected defraud” standard. Given the legal risks cre- by technical means, the expectations and ated by these new bills, and the service practices of users who have grown used to provider approvals that might be required, time- and space-shifting content, and the manufacturers and retailers might choose legal regimes created to ensure access to not to produce or sell such devices, chilling copyright material such as fair use. Many con- the market for innovative applications. As of sumer advocates and scholars have focused the date of the drafting of this report, state on these questions.† “super-DMCA” bills have been passed or are under consideration in Arkansas, Colorado, † See, e.g., materials collected at
25 PROMOTING INNOVATION AND ECONOMIC GROWTH
Pennsylvania, Tennessee, Texas, and 3. The Berman Bill † Virginia. On July 25, 2002, Rep. Howard Berman 2. The Hollings Bill (D-CA) introduced a bill that would permit copyright-owners to employ self-help tech- In 2002, Sen. Hollings introduced his nologies when their copyrighted works are Consumer Broadband and Digital Television infringed on peer-to-peer (P2P) networks. Promotion Act. In contrast to the DMCA’s “no The bill, known as the Berman bill, was tech mandate” direction, the Hollings bill, S. intended to enable the music and movie 2048, would have allowed the FCC to man- industries to legally use interdiction, decoys, date a security standard protective of digital redirection, file blocking, spoofs, or other content for all digital media devices; if the technological tools to prevent P2P piracy, but private sector was unable to agree to a stan- gave them immunity from criminal and civil dard on its own, the government was to devel- liability for such acts. The bill did not require op one. Under the bill, it would have been the copyright-owner to give advance (or sub- illegal to make or provide a “digital media sequent) notice to its target that it was plan- device” that did not contain such standard ning to employ self-help measures. security measures (or to remove such meas- In support of his bill, Rep. Berman said, ures). Proponents of the Hollings bill argued “the primary current application of P2P net- that the growth and development of digital works is unbridled copyright piracy. P2P content (and broadband deployment general- downloads today consist largely of copyright- ly) was being stalled by the absence of protec- ed music, and as download speeds improve, tion systems. They suggested that digital con- there has been a marked increase in P2P tent would not be secure and would not be downloads of copyrighted software, games, made available for distribution until some photographs, karaoke tapes, and movies.” form of digital rights management system The Berman bill was clearly intended to (DRM) was installed in all devices capable of enable the music and movie industries to displaying digital content — from TV sets to shut down the sorts of rampant copying that personal digital assistants to wristwatch cell- the court in the Napster case found to consti- phones to general purpose computers. They tute infringement. However, the bill was writ- insisted that the consumer electronics and ten with language broad enough to encom- information technology industries would not pass a variety of other scenarios, and provid- voluntarily accede to DRM usage, because it ed broad discretion to parties using self-help would add costs to the devices without provid- measures. Many things other than movies are ing consumers with what they would perceive protected by copyright — like educational to be added value, and that therefore the gov- and political materials — and the bill ernment must mandate the inclusion of required only that the copyright owner mere- DRMs. The Hollings bill has not yet been ly have a “reasonable basis to believe” that reintroduced in the 108th Congress. his/her materials had been infringed. And the right of self help provided for by the † Similar efforts are proceeding at the government-to-govern- Berman bill could be exercised by a copy- ment level: On May 6, 2003, President Bush and Prime right-holder to stop the dissemination of con- Minister Goh of Singapore signed the U.S.-Singapore Free Trade Agreement (the “FTA”), which requires Singapore to tent that the copyright-owner had not sold, implement DMCA-like anti-circumvention provisions. The FTA thus preventing the dissemination of expres- does not contain any of the DMCA’s exceptions to the scope of sion. While the scope of the actions that digital protections for copyrighted works. Brandy Karl, “Enforcing the Digital Millennium Copyright Act would be protected by the safe harbor provi- Internationally: Why Congress Shouldn’t Lock in the Current sion was not specified in the Berman bill, and DMCA By Approving the Current Version of the U.S.- while it was stated that all the actions that Singapore Free Trade Agreement,” (May 15, 2003) available at
26 Discussion of “Solutions” for Digital Copyright Infringement
considerable concern that self-help activities lawfully acquired copyrighted work. Boucher- would interfere with legitimate uses of com- Doolittle would amend Section 1201 of the puters or other devices and that the bill DMCA to allow circumvention of a technolog- would immunize those who engaged in such ical measure that controls access to and use actions from damage that they might cause. of a copyrighted act, if the circumvention One information technology association does not result in infringement of the work. rejected “the premise of this bill that content The bill would also decriminalize anti-circum- owners should be entitled to ‘vigilante justice’ vention tools when the tools have substantial for suspected copyright violations.”34 The bill non-infringing uses and broaden allowances was not passed in the 107th Congress. for anti-circumvention scientific research. In February 2003, Rep. Berman Boucher-Doolittle would also require record announced that he might not reintroduce his companies to label CDs that were copy-pro- bill, because copyright-holders may not need tected or that would not play on certain extra protection to combat file-sharing piracy. devices (such as PCs). Also, Hollywood’s support for the bill was Lofgren. On Oct. 3, 2002, Representative weakened by Rep. Berman’s plan to impose Zoe Lofgren (D-CA) introduced H.R. 5522, new liabilities on copyright-holders that went the Digital Choice and Freedom Act of 2002. The too far in attacking pirates.† bill would amend the Copyright Act to allow consumers to use CDs, DVDs and other digi- 4. “Fair Use” Bills tal works on the devices of their choice and At the other end of the spectrum, bills to sell or lend their personal copies of digital were introduced at the end of the 107th works. Rep. Lofgren explained that her bill Congress that attempted to bolster the rights “encourages content owners to respect con- of end users and creators who rely on existing sumer rights and expectations by permitting copyrighted works. circumvention tools if they fail to do so.” The Boucher-Doolittle. On January 7, 2003, Rep. bill also provides that terms in nonnegotiated Rick Boucher (D-VA) and Rep. John Doolittle licenses (“shrinkwrap” or “clickwrap” licens- (R-CA) re-introduced the Digital Media es) that restrict rights of users under the Consumers’ Rights Act (DMCRA). Copyright Act will not be enforceable.†† To date, the Copyright Office has not allowed an exemption from the DMCA’s anti- B. REGULATION: THE circumvention provision for those who cir- BROADCAST FLAG cumvent a technological lock in order to make a non-infringing use (such as a use per- For several years, the FCC has been engag- mitted by the copyright law for fair use, class- ing in reviewing proposals for a “broadcast room, preservation or similar provisions) of a flag.” Providers of video content want to avoid being “Napsterized” by online file- traders and proposed to mark video content † On May 4, 2003, The New York Times reported that “[s]ome with a short digital tag (the “broadcast flag”); of the world’s biggest record companies, facing rampant online piracy, are quietly financing the development and testing of machines receiving digital television content software programs that would sabotage the computers and would be required to recognize this tag and Internet connections of people that download pirated music.” ensure, by way of new forms of enforcement Andrew Ross Sorkin, “Software Bullet Is Sought to Kill Musical Piracy,” The New York Times, May 4, 2003. Industry spokespeople software, that the content is not subject to have said publicly that, just as the “left” believes it has a right to hack overly protective DRM measures, the content industry believes it also has a right to use self-help. Prof. Lawrence †† In a related development, in September 2003 Sen. Sam Lessig of Stanford Law School stated that “Some of this stuff is Brownback (R.-Kan.) introduced legislation directed at curbing going to be illegal...It depends on if they are doing a sufficient the DMCA-provided ability of copyright owners to obtain iden- amount of damage. The law has ways to deal with copyright tity information about ISP subscribers without judicial supervi- infringement. Freezing people’s computers is not within the sion. Roy Mark, “Brownback Bill Aims to Curb DMCA scope of the copyright laws.” Subpoena Powers,” DC.Internet.com, September 17, 2003.
27 PROMOTING INNOVATION AND ECONOMIC GROWTH
any “unauthorized use” — and, in particular, FCC’s jurisdiction to issue this first order are is not transmitted either over the Internet or expected. In recent months, there have been over insufficiently secure wired connections several Congressional hearings on the broad- inside one’s home.† cast flag, and it is likely that broad legislation While the objective of blocking Internet on this subject will be introduced in the next transmission seems simple, what ultimately few months. would be needed to implement this goal is a Plugging the “analog hole.” The broadcast government mandate that would require that flag proceeding concerns locking down digi- all devices that touch digital broadcast con- tal outputs of devices only, and does not con- tent be “compliant” (possessed of approved strain analog outputs. This means that technology to prevent unauthorized use of “flagged” digital material could be captured content) and sufficiently “robust” (secure and from an analog output such as one contained nontamperable). Like the Hollings bill, the in an analog video display device (e.g., a broadcast flag regime, as proposed, would VCR), transformed into high-quality analog apply to “downstream devices” which include form, and then redigitized — in the process, a broad range of machines — anything capa- the “flag” being considered by the FCC would ble of receiving or storing or copying digital be lost, and the result of this digital-analog- broadcast content, such as PCs, televisions, or digital conversion would be a high-quality file mobile phones.†† that was available for perfect and unlimited In November 2003, the FCC issued its first digital copying and transmission with no order in its broadcast flag rulemaking.35 “flag” attached. The content industry is con- Supporting the flag proposal, the FCC cerned that control needs to be extended to required that devices that receive digital tele- any outlet through which digital material vision broadcasts sold after July 2005 must could “leak” into analog form without the include content protection technologies flag and then be redigitized — in popular approved by the government. The first order parlance, they believe that they have to plug left unresolved a number of important the “analog hole.” In an April 2002 “Content issues—-who will approve the technologies, Protection Status Report” provided to the using what criteria, and what uses (e.g. copy- Senate Judiciary Committee by the Motion ing, time and space-shifting, sharing, sending Picture Association of America, the MPAA over the Internet) of flagged content will be said that analog-to-digital converters needed allowed, including what use will be permitted to be regulated to ensure that they responded in a “personal digital network environ- to a “watermarking” technology that would ment”—- which will be considered in a subse- survive digital to analog conversion. This is a quent rulemaking. Judicial challenges to the very broad goal, because analog-to-digital converters are present in any number of machines — including digital scanners, sam- † As currently constituted, the 5C suite of technologies that are plers, thermometers, seismographs, computer anticipated to be approved copy protection technologies under the broadcast flag regulation would not allow wireless transmis- pointing devices, camcorders, cameras, sion, even within the home although new proposals for protect- microscopes, telescopes, modems, radios, ing wireless transmission have been put forward. televisions, cellular phones, walkie-talkies, and many other devices. †† Mobile phones capable of showing analog television are just beginning to hit the market. E.g., the Samsung SGH-P705 is a For the process of plugging the analog phone and an NTSC television. Cellular telephones that can hole to proceed, a watermarking technology receive terrestrial digital television broadcasts will be marketed will need to be chosen that survives digital- in December 2003 in three major Japanese cities; See 3G, (press release, “3G Phones Evolve in the Ubiquitous Era,” analog-digital conversion. Led by the MPAA, London, England: October 9, 2003), available at the information technology, consumer elec-
28 Discussion of “Solutions” for Digital Copyright Infringement
tronics, and entertainment industries formed sumer electronic and computing based tech- a discussion group in February 2003 (the nologies in their homes. As of the date of the Analog Reconversion Discussion Group) to preparation of this report, the FCC had work on this issue. issued an initial Order with respect to this Cable/CE MOU. Recently, the cable servic- “plug and play” MOU, saying that consumers es and consumer electronics industries devel- will still need a set-top box to receive two-way oped a framework for plug-and-play compati- services such as video on demand, impulse bility among consumer devices that can pay-per-view and cable operator-enhanced receive cable services. A proposed agreement, electronic programming guides.37 The FCC the Memorandum of Understanding Among Cable noted that the cable and consumer electron- MSOs and Consumer Electronics Manufacturers, ics industries continue to work on the devel- was considered by the FCC.36 The draft agree- opment of an agreement for two-way “plug ment outlined “encoding rules” (statements and play” receivers that would eliminate the about how many and what kinds of copies need for a set-top box to receive these consumers will be able to make using advanced cable services. Thus, the FCC has approved technologies) that prohibited or approved a baseline “cable ready” standard constrained copying of commercial content that connotes a oneway download ability to received over a cable system regardless of view digital video programming, but has not whether such copying posed a security threat yet established rules for two-way interactivity. or a copyright infringement. For example, The cable and consumer electronics the MOU’s encoding rules would have pro- industries also filed a model license for the hibited time-shifting of a pay-per-view pro- 5C-based scrambling technology, which pro- gram. In general, the encoding scheme pre- tects content from unauthorized use. The sented in the MOU would have limited copy- FCC concluded that, “given the importance ing to a greater degree than it is limited with of these products as a portal into consumers’ current consumer electronics or computer homes for content in the digital age, further equipment. Additionally, the draft MOU consideration of how innovations and locked in a particular group of content-pro- changes [under this license] should be tection technologies (the 5C suite of tech- approved was warranted.”38 The Plug and Play nologies) and thus might have locked some Order initiated a Second Further Notice of players out of the marketplace. Proposed Rulemaking (FNPRM) to examine The FCC was asked to define “digital these issues. This means that the FCC has cable-ready” to mean that a given device used decided to look hard at the licenses covering the 5C suite of technologies. Thus, if the copy-protection technology in the cable con- MOU was approved by the FCC in the form it text, to determine whether consumer-friendly was proposed, only machines that used this protections (such as protection for “Betamax- particular proprietary content-protection like” fair use) are included in these licenses. technology would have been able to call Because the FCC will have an oversight role themselves “digital cable-ready.” In the 5C in the approval of new outputs and content world, once flagged content is recognized by protection technologies under this MOU, the a 5C compliant device, it cannot be transmit- Commission will be able to ensure that PCs ted to (or played on, or copied by) any non- and other devices with open architectures compliant legacy device. So if 5C had been and alternative copy-protection schemes are the endorsed technology, consumers would included in the DTV transition. Several have been able to copy and play content only Parties, including the MPAA and the National on 5C devices. For many consumers, this might Cable Television Association, have asked the have meant substantial (and perhaps surpris- FCC to reconsider portions of the Plug and ing) required upgrading of much of the con- Play Order.
29 PROMOTING INNOVATION AND ECONOMIC GROWTH
These so-called “EZ-D” DVDs are set to C. PRIVATE DRM become unplayable after two days, when “a Private DRM efforts have been underway process similar to rusting makes them for some time, as evidenced by the early unreadable.” When “rented” (or sold), the “dongle” attempts in the 1980s. There are, discs are red — but two days’ exposure to generally, two levels of protecting content oxygen turns the discs black and makes it through technology: restricting duplication of impossible for a laser reader to read data off the content, and implementing access con- the discs.†† trols that ensure that only valid, authenticat- There are now audio CDs that are copy- ed users can use the content. DVD and CD protected and cannot be played on a comput- protection are examples of the former; the er (or can be played only through play-back Trusted Computing Platform Alliance is an software, not “ripping” software). Music files example of the latter. contained on these CDs will not play if they DVDs and CDs. In 1995-1996, an inter- are distributed over the Internet or emailed. industry group pooled their patents, formed Although CD copy-protection technology is the DVD Copy Control Association, and proprietary, researchers have been able to agreed on a Content Scrambling System determine that it works by deliberately creat- (CSS) encryption technology that all devices ing errors so as to cripple the CD’s ability to touching DVD content would have to use. be copied — or, sometimes, by placing Under the DVD CCA licensing regime, instal- “dummy” files on the CD that are so large lation of CSS is required (as is adherence to a that CD recorders cannot burn them. In DVD CCA license) in order for decryption of some cases, use of copy-protected CDs has DVDs to legally occur in any device. DVD play- prevented radio stations from playing the ≠ ers need CSS circuitry to be able to decode songs — because the station used only PCs. and play the contents of these discs. And to The digital content is being successfully pro- play on computers’ DVD-ROM drives, the tected, but at the cost of limiting broadcast DVD-decoder hardware and software need to exposure normally used to spur sales. include a CSS decryption module. No person- Trusted Computing. The Trusted al use copying of DVDs is permitted by CSS. Computing Platform Alliance, or TCPA, has CSS was successfully hacked in 1999 with been formed by Compaq, HP, IBM, Intel and the creation of DeCSS. DeCSS allows a DVD Microsoft, and more than 190 other compa- to be played on a Linux machine. No Linux nies have joined up. TCPA has defined what DVD players were available on the market at it calls a “general purpose Trusted Subsystem” the time DeCSS was created — so DeCSS intended for use in PCs. Using this system, filled a gap perceived by Linux users†. computers can remain open platform devices Additionally, DVD movies are often that contain within them secure kernels for region-protected, so that (for example) DVDs content protection. The plan is for this to coded “region one” (US and Canada) will not happen through built-in security features play anywhere else in the world. This vestige incorporated in both hardware and software. of the distribution regimes established for On the software side, Microsoft is working on physical goods has also been successfully hacked. †† See, Reuters, “Disney to slip DVDs a Mickey,” May 16, 2003, Recently, Disney announced that it will be available at
30 Discussion of “Solutions” for Digital Copyright Infringement
a secure operating system. More generally, Debates about all of the pro-protection part of the idea of “trusted computing” is for legislative and regulatory efforts described the content itself to signal how it is to be pro- above have focused on the claim that greater tected, using Extensible Rights Markup control by, and greater incentives for, creators Language (XrML) — a set of statements and distributors are justified because of the about the digital rights of the user and the unique threat posed by digital technologies. conditions under which such a license is But the policies proposed would also affect granted.† Licenses can be written in XrML the key role of follow-on innovators. All of (thus stating the policy of the rights-holder) these legislative and regulatory efforts (as well and adhered to by DRM software (thus imple- as private DRM solutions, to the extent they menting the rights-holder’s policy desires). are mandated by government) would raise The policy questions surrounding XrML are the costs of creation by the follow-on innova- complex: Who decides what rights should be tor. As a result, these proposals are likely to expressed in this language and what these lead to an underproduction of innovation rights mean? How do “fair use” and “first from those who would otherwise base their sale” interoperate with devices that imple- work on earlier created work. Moreover, ment XrML commands? because the purpose of these proposals is to There has been very little public involve- provide for greater control by the original ment with TCPA or XrML processes. Nor has rights-holders, whatever innovation is allowed there been public participation in the DVD to occur will happen under the control of or CD licensing/lock-down discussion. These those who came before. These original rights- are, in general, private solutions to the copy holders want to create an “orderly market- protection concerns of the content industry place” in which innovation happens “accord- to which “notice and comment” rules of regu- ing to the rules.” To the extent that such con- latory agencies do not apply. trol channels innovation to areas that do not threaten incumbents or undercut existing D. ANALYSIS business models, the likelihood of genuine breakthroughs will be sharply reduced. Each of these proposed solutions (legisla- One form of innovation that has drawn tive, regulatory, and contractual) has power- the attention of economists is likely to be par- ful proponents who argue that increased con- ticularly affected. User-led innovation results trol over copyrighted goods will stimulate cre- from changes made to products by customers ative activity by providing greater incentives themselves — who know better than any sup- for creators and rights-holders. On the other plier what their needs are. Leading edge cus- hand, there are strong arguments that wide- tomers, now bound by technologically fixed ranging technical mandates will dampen licensing agreements, would be unable to innovation, damage the high-tech industries, make changes to create new products or to and fundamentally alter the traditional bal- devise new uses. In a recent example of user- ance between rights-holders and users with led innovation, a purchaser-licensee of SONY negative impacts on the public domain. The Corporation’s AIBO robot dog, obtained, in following section addresses the various violation of the license, the source code, proposals. which allowed the dog to perform a limited 1. Dampening Innovation number of dances. The purchaser-licensee, a programmer and AIBO enthusiast, then pro- a. Raising the Costs for the Second grammed the dog to do more dances and Innovator made the program available to other AIBO
† XrML is based on work by the OASIS Rights Language hobbyists. SONY objected until its customers Technical Committee in defining a Rights Markup Language; made clear that a programmable, more See www.xrml.org.
31 PROMOTING INNOVATION AND ECONOMIC GROWTH
“open source” dog that could do more printer. Those chips cause the printers to dances was more valuable to them than a malfunction if the replacement cartridge “proprietary” dog with a more limited reper- comes from anyone other than the original toire. manufacturer. In response, Static Control Limits on research. The effects of these pro- designed a chip that enabled replacement protection proposals, as well as the effects of cartridges to work in the Lexmark printers. existing laws intended to protect digital con- That resulted in a lawsuit, in which Lexmark tent, are quite direct in limiting research. For successfully alleged that Static Control’s example, the DMCA’s strictures regarding microchip “spoofed” its copyrighted software ≠ anti-circumvention measures have been read in violation of the DMCA. Another recent to discourage reverse-engineering — a tech- DMCA assertion was that a universal garage nique that has traditionally been used in the door opener was a circumvention tool.* In high-tech area, perhaps most intensely in the November 2003, an Illinois federal judge videogame industry, to facilitate the develop- ruled that the DMCA did not apply to garage ment of new products and services.† door openers to which no notice saying, Ironically, the DMCA may also be inhibiting “interoperability is not allowed” had been research about ways of making information attached. The judge’s reliance on the plain- more secure. While the DMCA includes an tiff’s lack of notice to consumers left the core exemption for certain research regarding DMCA issue of the legality of interoperability encryption, at least one noted researcher in unresolved. § the area was reminded by the Record b. Reducing Incentives to Innovate Industry Association of American that he might be sued under the DMCA for disclo- The broadcast flag and Cable/CE agree- sure at an academic meeting of encryption ments have in common their focus on researchers of his findings that the methods enshrining a particular group of proprietary proposed by the RIAA for securing music technologies (the 5C suite of technologies) as were, in fact, insecure.†† copy protection technology in all consumer Anticompetitive impacts on the development of electronics devices capable of storing, pro- new products and services. The potential reach cessing, transmitting, and displaying digital of the DMCA is beginning to emerge in court broadcast or cable content.‡ (The Hollings cases. Some of the uses to which the Act is bill made a suggestion that an effort be made being put may impede research and develop- to find an appropriate copy protection that ment efforts related to product development in areas far afield from digital copyright pro- ≠ During a recent Copyright Office hearing concerning addi- tions to DMCA exemptions, Former Register Ralph Oman, rep- tection. Indeed, several commentators have resenting Lexmark, at one point appeared to assert that users suggested that the DMCA may be used for need permission to run a computer program, and consequent- anti-competitive purposes. For example, in ly that if users use a computer program for a purpose of which its author disapproves, they are infringers. Email from Seth the recent Lexmark v. Static Controls case, Schoen of EFF, May 9, 2003. Lexmark, one of the top U.S. manufacturers of computer printers, tried to stop other com- * Chamberlain v. Skylink, Civ. No. 02 C 6376 (N.D. III). panies from supplying cartridges for its print- § See, Memorandum Opinion and Order, November 13, 2003. ers by installing tiny computer chips in each ‡ The joint proposal of the Digital Transmission Licensing Administrator, LLC (DTLA) and the Motion Picture † See, Pamela Samuelson and Suzanne Scotchmer, “The Law Association of America, et al. (MPAA) in the FCC’s Broadcast and Economics of Reverse Engineering,” 111 Yale L.J. 1575 Flag proceeding is known as the MPAA/5C proposal. The “5C” (2002). consortium is made up of Hitachi Ltd., Intel Corporation, Matushita Electric Industrial Co. Ltd., Sony Corporation, and †† See, Letter RIAA to Professor Edward Felten, April 9, 2001, Toshiba Corporation. 5C has developed the Digital Trans- available at
32 Discussion of “Solutions” for Digital Copyright Infringement
would shield all digital content.) The order to prevent further dissemination of this approval of any particular copy protection hack, courts have essentially established a technology by the government may dampen prior restraint on publication: preventing innovation and competition in this market- websites from linking to other websites that place. While the present proposals envision provide the means to decrypt DVDs. Such subsequent development of additional copy restraints are normally thought of as allow- protection technologies that could be able only in circumstances akin to publishing approved by the FCC, any government the departure times of troop ships during approval of a first standard will reduce the wartime, but here were authorized to protect economic incentives for those who might pro- a technical protection mechanism that had duce follow-on or alternative technologies already been compromised. that would have to compete with an approved c. Allowing Industry Gatekeepers to and established standard. Control Innovation Even the private choice of particular tech- nical protection schemes — such as the Some of the present proposals place present DVD encryption technology, which rights-holders in a position to impose stan- has already been hacked — is likely to inhibit dards on a broad range of devices. It is the development of stronger or different important to examine who chooses copy protection technology. The enforcement “approved” devices and content protection of these schemes through non-negotiable technologies because of the effect this role license arrangements that prohibit unautho- has on incentives to innovate. For example, rized interoperability only heightens this con- we understand that proponents of the broad- cern. If DVD-player manufacturers knowingly cast flag proposal have said that they want to employ less robust (or already-hacked) tech- have it affect the fewest possible devices. But nology and rely on the law to protect them, the current flag proposal explicitly establishes there is clearly less incentive for others to the studios as approval-granters over future develop and bring to the DVD licensing product design for all devices that touch digi- regime stronger protection technologies. A tal video content.† Such a “gatekeeper” role widely-adopted or governmentally mandated potentially puts the rights holders in a posi- standard may diminish incentives to create tion to approve new technologies. The pro- “better” protection. This would surely be a posed flag regulation raises concerns about perverse effect. It seems better to stimulate whether self-interested industry gatekeepers competition to produce better protection will be in a position to approve uses of new than to enshrine a particular technology by products that have previously been accepted governmental mandate or industry fiat. as reasonable (such as recording a program If law rather than technology is relied on standard fixed media) or new innovations upon, the results may be unexpected. The (such as securely sharing a program on a DVD encoding scheme has been cracked and WiFi network). Imagine if those who sought the results have been posted online. But in to bring the videocassette recorder to the consumer marketplace in earlier days needed which administers the licensing of DTCP. The characterization the approval of the broadcast or movie of 5C as a suite, rather than just a set of intercompatible tech- nologies, is bolstered by the terms of the DTCP license, which industries. largely restrict digital output to “approved” technologies. The Cable/CE MOU now under consideration by FCC involves ask- ing the FCC to endorse the 5C suite of technologies for protec- † Additionally, if the flag rules are put into effect, all 45 million tion of cable content. See, In the Matter of Implementation of DVD players currently in consumers’ hands will become obso- Section 304 of the Telecommunications Act of 1996, Commercial lete — because they will not be “compliant,” they will not be Availability of Navigation Devices, Compatibility Between Cable permitted to manipulate DTV content that has been recorded Systems and Consumer Electronics Equipment, Federal on a “compliant” DVD recorder. Edward W. Felten, Professor Communications Commission Further Notice of Proposed of Computer Science, Princeton University, Testimony before Rulemaking, FCC 03-3 (Jan. 10, 2003). the Senate Commerce Committee (September 17, 2003).
33 PROMOTING INNOVATION AND ECONOMIC GROWTH
d. Providing the Right Incentives that copyright protection is better obtained through the forensic use of watermarks (thus In supporting the broadcast flag proposal, moving the complexity of protecting the con- rights-holders have argued that in order to tent inside the content itself by stamping con- protect their intellectual property rights they tent with a mark and then looking for it out need a governmental mandate requiring all on the Internet, rather than forcing this com- devices that touch digital broadcast content plexity on hardware), lead in the same direc- to be sufficiently “robust” (secure and non- tion. tamperable) and “compliant” (possessed of approved technology to prevent unautho- e. The Weaknesses of DRM rized flows of content through digital out- All of the proposals under discussion puts). But the effect of this proposal is to involve an increased use of digital rights man- reduce the incentive of the rights-holders to agement technology, whether mandated by protect their own content. government, approved by government, or as Most analysts would say that the most part of private contractual arrangements. And effective way to protect content is to protect it any system that seeks to monitor use of digital as close as possible to the point of origina- information so as to reward rights-holders will tion, rather than broadcasting it “in the clear” need some form of DRM. The Digital and imposing standards on machines that Connections Council supports a rich, compet- receive the content.† Thus, film studios could itive marketplace in DRM options that pro- encrypt their movies at the source and they vides reasonable choices to consumers as well would then be broadcast in encrypted form. as protection for copyrighted works. But it is For political reasons, this idea has not taken important to realize the limitations of DRM. root.†† Opponents of “encryption at the Simply put, DRM systems are likely to fail. source” have said that this technique would Technologists almost uniformly view them as instantly make obsolete existing digital televi- potentially valuable in the short term, as sion receivers — because they would not have “speed bumps” that slow down attempts to the decryption boxes necessary to allow the obtain unauthorized access to digital informa- broadcast content to be viewed. But oppo- tion, but vulnerable in the long term. The nents of the flag proposal argue that (1) not average person might be unable to mount very many DTV receivers are now in the even a rudimentary attack, and even talented hands of consumers; (2) a $25 device could “crackers” might fail. But just one successful perform the necessary decryption; (3) early attack can be incorporated into software that adopters of DTV would likely be willing to will permit even an amateur to succeed. pay the extra $25; or (4) the content industry Even if their fundamental weakness runs could pay for these devices in order to pro- deep, there are a large number of problems tect its valuable content. Recent suggestions with DRM that are closer to the surface. † Indeed, there is substantial evidence that most films make Implementation of DRM systems inherently their way online not through consumer copying but through increases systems cost. Due to the complexity leaks from inside the studios themselves — the so-called “stu- and heterogeneity of the devices in which dio hole.” See, Simon Byers, Lorrie Cranor et al., “Analysis of Security Vulnerabilities in the Movie Production and DRM-protected content must operate, DRM Distribution Process (2003),” available at
34 Discussion of “Solutions” for Digital Copyright Infringement
DRM systems can also convey a message to being rewarded that they will make their consumers that companies are trying to pro- works available to the public. And even tect themselves against their customers, and though DRM systems may be cracked, they thus that the interests of the consumer and will serve as speed bumps; most consumers the company are adverse. Equally damaging will accept DRM limitations and not use avail- can be the lack of a message — a lack of able work-arounds, particularly if they feel notice that what the consumer is purchasing that they are getting adequate value for their cannot be used on the same devices as appar- money — as can be seen from the widespread ently identical media that the consumer pre- consumer use of DVDs whose protection viously purchased.† scheme was cracked several years ago. But as There is another policy issue raised by in other markets, it would be preferable to DRM systems. There is a substantial risk that have competition rather than fiat in the DRM any information-gathering accomplished by market and assured appropriate consumer the DRM software will create data privacy lia- access to protected content. bility for providers under the Data Protection Consumers will benefit most from simple Directive of the European Union or other DRM that they understand well. Making con- similar laws. sumers spend a lot of time thinking about Compared with the regular version of any whether they want to spend a dime on this device, the DRM version will have many new song now or later or never will create a good ways of failing. This means that equipment deal of social cost, and requiring complex companies will have to staff helpdesks and DRM systems may reduce their commercial fund higher support costs. Also, compared to potential. It is critical to acceptance of DRM the regular version, the DRM version will systems that they be simple, convenient, easy have more versions, more customization fea- to use, and easily understood by consumers. tures, and more internationalization issues, and will, therefore, be more expensive to 2. Impact on High-Tech Industries keep in inventory. All of these costs will have to be carried by equipment manufacturers. A key metric against which all of the cur- For content companies competing with rent proposals should be measured is their each other on the nature of the rights pack- impact on U.S. high-tech businesses. The ages they grant, it is inevitable that customers extent to which these proposals: will begin to comparison-shop for rights. This will put price pressures on these rights grants •shift costs to the high-tech industry; and will drive their value down. This cannot • negatively affect a sector that has been be a good business model for content compa- responsible for substantial productivity nies.†† gains; Yet even with these difficulties, some forms of DRM are likely to be part of the solution to • put government in the position of mak- today’s controversy. Clearly there is a need to ing decisions about product design; make rights-holders confident enough about • limit open platforms (such as the general purpose computer) and open † See Section VI(A), describing legislative attempts to address source product development; this problem. • and generally dampen the economic †† Dr. Bob Blakley of IBM analyzed the weaknesses of DRM at a recent DRM conference at Berkeley, and many of the ideas in activity generated by the purchase of this section were drawn from that presentation. The Law and equipment to record, store, manipu- Technology of DRM Conference, Berkeley, California, late, and transmit digital content needs (February 27 - March 1, 2003), available at
35 PROMOTING INNOVATION AND ECONOMIC GROWTH
a. Shifting Costs This cost-shifting effort is not without precedent. Rights-holders’ historic reaction to The proposed use of governmental man- piracy has been to seek levies on recording dates dramatically shifts the cost of protection devices and media, arguing that manufactur- onto the consumer electronics, information ers profit from products that are used for technology, and Internet access industries.† If these purposes. This effort makes some sense content providers encrypt, they have to pay when applied to single-purpose devices that for encryption; if the broadcast flag or have been built only to copy the studios’ con- Cable/CE agreement mandate encryption tent. But it makes less sense when applied to through the regulation of hardware and soft- flexible, open-platform, multifunction devices ware, the content industry will get whatever such as personal computers. protection this provides for free. The reality There is another form of cost shifting that is that most home devices are not used for occurs: the costs borne by consumers when piracy. Any regulation mandating copy pro- hundreds of millions of devices that do not tection technology will require that all home conform to standards for technical protection devices and all enterprise computers (some (mandated directly by the government, or rat- 85 percent of U.S. computers are manufac- ified by the government) are rendered obso- tured for use by enterprises, not consumers) lete. If the analog hole was ever successfully recognize “flagged” material and treat it appropriately. This means that all of these millions of devices will have to be redesigned COST-SHIFTING for this special purpose, and these costs will be born by the manufacturers of these The music industry has said it plans to devices and, ultimately, by consumers. It recoup revenue lost to free P2P services from would be preferable for those who have the other industries that have benefited from greatest incentive to protect their content to these file-sharing services. The Canadian †† Private Copyright Protective (the Canadian have the task of doing so. equivalent of the RIAA) has proposed a $21 per gigabyte fee for hard disk drives that † See, Raymond James Report at 36. would compensate copyright-holders for file- sharing losses.(a) The group has also asked †† See, e.g., John Markoff, “Plan Would Use Software, Not Devices, to Fight Piracy,” New York Times, April 15, 2003. the Copyright Board of Canada to significant- Another approach whose proponents argue that it might ly increase fees on recordable DVDs and CDs. more appropriately balance benefits and burdens between The music industry may try to collect pay- rights-holders and others in the digital copyright context ments from Australian broadband Internet would be to establish a compulsory license to be paid by ISPs providers, believing that demand for faster on behalf of their users in connection with access to and trans- music downloading speeds may be driving mission of any copyrighted work. In a variation of this propos- al, Fred von Lohmann of EFF proposed a compulsory license demand for high-speed Internet service. The fee to be paid via a surcharge on Internet access with a portion chief of the RIAA said in a speech to a music of the money paid to the record labels and a portion paid conference in Cannes that she planned to directly to artists based on popularity on file-sharing networks. “hold Internet services providers more
36 Discussion of “Solutions” for Digital Copyright Infringement
closed, all existing analog devices that were transmission capabilities become part of capable of displaying or storing digital con- more and more devices, all of these machines tent would become incapable of optimal per- may be swept into a world of copyright regu- formance in the processing and display of lation. digital information, even if they were capable Part of the reason for the success of digital of being partially upgraded via hardware or computing has been the freedom to develop software.† Given the roughly 270 million tele- new products and services that take advan- visions in 100 million U.S. households and tage of the extraordinary progress made in the 92 million households with VCRs, this is processing, storage, and transmission of digi- no small effect with no small cost.39 tal information. One can see the startling Earlier copy protection schemes failed results of such freedom in the growth of the when consumers were willing to pay more for Internet. Anyone can design and implement devices that were more flexible and capable a new product or service at the edge of the — and that provided them with more of the Internet without seeking the approval of a bundle of intellectual property rights than central authority. Moreover, the design princi- those devices that were locked down. Unless ple now enshrined at the center of the the market for devices is perfectly regulable, Internet is that Internet standards should not devices that provide more rather than less be optimized for any particular application, capability will prove more attractive to con- in order to prevent today’s design constraints sumers and will command higher prices in from preventing the emergence of tomor- the marketplace. “Illegal” devices, whether row’s “next big idea.” Yet the current propos- hardware or software, are manufactured in als for mandating particular technological other countries, and may well flood the U.S. protection mechanisms involve setting con- market. At the same time, the U.S. govern- straints on the design of all digital devices. ment will be saying that it has the power to Titanic legal battles have been fought to pre- eliminate choices of devices. Devices that pro- vent the exercise of private control over inno- vide greater constraints on consumer behav- vation in the personal computer software ior will be less attractive and will fail, unless market through a monopoly over the operat- government mandates eliminate other com- ing system market; mandating particular petitive choices for consumers. design constraints to protect digital content seems to be moving in the opposite direction. b. The Special Case of the General Moreover, compliance with the broadcast Purpose Computer flag (as currently proposed) would require Designed in a garage by hobbyists, the per- the general-purpose computer — still an sonal computer is an icon of American inno- open-platform device — to become “secure” vation. It is increasingly difficult to distin- and “untamperable.” Would this mean that guish between “computers” and all other future generations of garage tinkerers would devices, as consumer electronic products are be unable to open their devices, poke, push, built with memory and processing power, and or prod in order to bring us the steady stream microprocessors make walls and tables loca- of innovation we have come to expect? tion-aware. Given the sweeping nature of the c. Ignoring the Role of Open Source technical protection mandates that have been proposed, as processing power, memory, and These same broadcast flag requirements of being secure and untamperable create special problems for the developing area of open † Additionally, even if only a few analog-digital-analog convert- ers remain available (such as those that are imported from source software. Such a legal requirement is other countries), even a fully protected digital bitstream can be antithetical to open source software, which by converted at very low cost to a high-quality analog version — and then re-digitized. its very nature, is intended to be tampered
37 PROMOTING INNOVATION AND ECONOMIC GROWTH
with. Indeed, tampering is how open source software products (including security software “Another important plank in this agree- products) are improved. ment [between the RIAA, the Business The role of open source software is being Software Alliance, and the Computer systematically ignored in many of the propos- Systems Policy Project] is a firm commit- als under discussion in this report, and partic- ment to opposing government-imposed technological mandates. The RIAA ularly in the broadcast flag context. Open believes in innovation. And we believe source software is increasingly important as a that consumers in the marketplace, not source of innovation; it can be far more reli- the government, should decide which able and secure than proprietary software technological innovations will thrive.” because talented programmers around the Hillary Rosen, Business 2.0.(a) world can examine the code and try to break a. http://www.business2.com/articles/mag/ its security, without having to worry about 0,1640,48572,00.html. hidden backdoors or holes. Yet such examina- tion and the resulting improvement appears incompatible with a prohibition on tamper- ing high-tech product decisions. The high- ing. tech industry has also criticized the govern- Digital television signals can now be ment’s lack of technical expertise, and the demodulated in software, allowing general- fact that the essence of many government purpose computers to function as digital tele- decisions is political (even in the best sense of visions; software products with this capability the word). Having innovation overseen by a will be widely available in a few years. It is particular self-interested industry, or a slow- difficult to imagine the FCC successfully regu- moving government agency, or by officials lating software products. When open source attuned to the political impact of a decision, software products are capable of allowing is not the way the high-tech industries are viewers to see digital video on their home accustomed to operate — nor should it be. personal computers, neither the FCC nor the Any broad government involvement in DRM studios will know what “manufacturer” to sue mandates raises a substantial risk of back- if applicable regulations are ignored by these ward-looking regulation, freezing in existing products. ways of doing business. This kind of regula- d. Riskiness of Government Mandates tion will inevitably favor incumbents, and threatens to allow the past to control the As has been noted, there are substantial future. Government agencies should not be problems with widespread DRM usage, even in the position of making business decisions that which results from private agreement. in dynamic high-tech markets or mandating But government technology mandates raise the use of particular technologies. even more issues for the future of this coun- try’s high-tech industries. Traditionally, the e. Frustrating Consumer Expectations U.S. has relied on a relatively restrictive role The flag regime (and any mandated DRM for government, with market failures provid- scheme) will frustrate existing consumer ing a justification for limited government expectations — and if consumers are con- action. Government technology mandates fused they will buy fewer IT industry prod- have been particularly suspect in the fast mov- ucts. Consumers expect to be able to time- ing world of high technology both because of shift, fast-forward, store, copy, and use digital the pace of government — a slower pace in content in portable, mobile devices. Although legislating or imposing regulations may be consumers have (so far) been content with desirable to obtain broad agreement about encrypted DVDs, as they become more public law but is highly undesirable in mak- sophisticated and as convergence between
38 Discussion of “Solutions” for Digital Copyright Infringement
electronic devices continues, they may be who are used to being able to copy CDs or frustrated when they are not able to easily use them on any of their playback devices are move content from one favorite device to frustrated by these new restrictions, and there another. Reasonable consumer expectations has been a move to require that copy-protect- ≠ also include the expectation that existing ed CDs be clearly labeled. devices will continue to interoperate with new In the meantime, copy-protected CDs are devices.† beginning to move into the U.S. commercial A July 2002 GartnerG2 survey reported market in large numbers for the first time. that 77 percent of respondents thought they Analysts have reported that Arista Records (a should be able to copy CDs for personal use subsidiary of BMG Music) will be shipping in another device; 60 percent said they protected CDs into the U.S. in May-June should be able to give copies of CDs to mem- 2003.40 bers of their families; and 82 percent thought f. Overall Impact on the Information that they should be able to copy CDs for per- Technology Industry sonal backup purposes. These results do not square with the move towards copy-protection The potential shifting of costs of content of CDs. Copy-protected CDs limit users’ protection to the consumer electronics and options — preventing them from making a information technology industries poses a copy of the CD to play in their car, for exam- challenge to one of the most dynamic sectors ple, as one could with a cassette tape. But of the U.S. economy. Not only would such they also limit the ability of consumers to use cost-shifting reduce the incentives of the con- the same CD in different places or on differ- tent distribution industry to manage the tran- ent machines. In some cases, the protected sition to a digital world — and place the CDs cannot even be played in more than one incentives on a sector farther from the source of the consumer’s CD players.†† Consumers of the problem — but, by imposing design constraints, it would also challenge the infor- † Under the flag regime, this simply will not be the case. mation technology industry’s ability to inno- Existing (“legacy”) storage devices will not be permitted to store flagged content. Legacy players will not be permitted to play vate. That innovation has resulted in enor- flagged content. Content stored upstairs will not be playable mous investment in information technology downstairs — unless a “compliant” device is already in place over the last decade (a critical factor in the downstairs. If the flag regime is put in place, consumers will have to get all new devices for their home networks — and busi- economic successes of the U.S. in the 1990s) ness users will have to decide how to cope with these severe and contributed substantially to the upward interoperability problems. See generally, In the Matter of Digital trend in productivity growth that emerged in Broadcast Content Protection, MB-02-230, Before the Federal 41 Communications Commission, Reply Comments of Public the U.S. in the late 1990s. And despite the Knowledge and Consumers Union (filed February, 18, 2003). recent slump, computer and electronic prod-
†† In a related development, after Intuit recently released a ver- uct manufacturers shipped $429.5 billion 42 sion of TurboTax that included a key “tying” the software to a worth of goods in 2001. particular machine (and thus preventing its use on multiple These numbers dwarf the $69.4 billion home machines), uproar caused it to backtrack and provide an uninstaller program to users.
39 PROMOTING INNOVATION AND ECONOMIC GROWTH
positive trade balance — it is fair to ask creative works notwithstanding what the law whether shifting costs to the IT industry is says about fair use. If a copyright-owner could analogous to the tail wagging the dog. establish perfect DRM, either through private Attempts to lock down information and agreement (as in the cable and satellite con- force the production of lower capability texts) or through governmental mandate (as devices — in the face of technology trends in the broadcast flag context), such an owner that continue to improve the ability of these could ignore these existing user-rights — devices to record, store, manipulate, and unless the law provided users of these safety transmit digital information — also ignores valves with some form of enforceable rights. the significant economic activity entailed by Two problems stand out with respect to consumers participation in digital content. accepting this technological approach to Much consumer activity in this arena is, obvi- legal rights. First, it may substantially narrow ously, legal. Billions of dollars are spent annu- the public domain — expansion of which is a ally by consumers for Internet access, and this central tenet of the bargain underlying our number is increasing daily as broadband pen- copyright laws. Second, it may undermine etration continues to grow. And the growth in societal respect for law and discourage self- the number of devices (particularly portable enforcement. devices) that allow users access to content has a. Restricting Public Access to been dramatic. Six million portable digital Digital Information media players were shipped in 2001, up 50 percent from the year 2000.45 The list of The absence of user control over private, media and devices that are designed for digi- non-commercial uses of lawfully obtained tized content continues to grow: satellite TV, content has substantial implications. Secure systems that do not allow reasonable uses to cable TV, digital broadcast TV, video cam- be made of protected digital information corders, digital still cameras, personal video (unless a license fee has been paid) surely recorders such as TIVO, CDs, DVDs and their impede the user’s ability to make productive respective players, CD and DVD burners etc. uses of the locked-up materials that could — many of these devices are recent additions themselves “promote the Progress of Science to this list.46 and useful Arts.” 3. Impact on the Public Domain For example, a key (and common) trans- formative/productive use of content is “sam- Many of the digital rights proposals under pling” — fragmentary “theft” used in a way consideration threaten to change the tradi- that does not create a loss to the owner. tional balance struck between the incentives Appropriation has been an integral part of provided to creators by allowing them to con- the creative process since there was a creative trol the exploitation of their work and the process, and the digital era is rich with exam- rights of users to have some form of access to ples of new works created through sampling. the work and some right to make use of it. Users can access millions of sounds, riffs, That balance, developed over hundreds of loops, and sonic textures online and use years, has produced widespread voluntary them to create their own works. Existing adherence and seemed to fit comfortably in a DRM systems do not permit sampling of the world of tangible books, magazines, and works they lock down. videocassettes — the world of atoms. According to the American Library We now have a situation where technology Association, the DMCA’s prohibition of cir- can trump existing legal rights: DRM schemes cumvention “places criminal penalties on top (such as the proposed “broadcast flag” sys- of contractual restrictions, thereby increasing tem) theoretically allow control over access to publishers’ ability to control access to
40 Discussion of “Solutions” for Digital Copyright Infringement
works.”47 The libraries are concerned that law provides no alternative path for access technical measures currently in use “blur con- (even for the purposes for which fair use was trol over initial access with control over codified), users will find the sphere of pub- library lending and fair use practices such as licly available material shrinking rapidly. viewing, reading, extracting, copying, and The fundamental idea behind intellectual printing.”48 Moreover, a DRM system’s tech- property protection is that creators are enti- nology may not recognize when the works it tled to limited incentives in order to stimu- protects are no longer subject to copyright late the production — and distribution — of protection and therefore have fallen into the new works. We grant limited privileges to cre- public domain. Such potentially unlimited ators because we want them to create and to control is also contrary to the philosophy share their works for the benefit of society as behind the first sale doctrine, which calls for a whole, not in order to give them total con- extinguishing control over “copies” once they trol over how their works are used. The cen- have been distributed.† Restrictive licensing of tral problem with broad use of DRM is not digital works is becoming the standard, and that software code will be regulating users, as print sources become increasingly obso- but that content creators will be unilaterally lete, users are being forced to agree to what- regulating private uses of content and con- ever conditions are stated in private licenses trolling the course of subsequent innovation. in order to get access to the information they b. Undermining Self-Enforcement need. The content distribution industry asserts It is one thing for society to make some that only if they have sufficient control to action “wrong” or “illegal.” It is quite another allow for certainty in their digital distribution for society to enable private parties to make channel can they provide users with a wide an otherwise lawful action impossible. variety of choices and price points for Building digital walls may be antithetical to licensed use of their material. This is a power- building trust and that sense of community ful argument for allowing the market to func- that is essential to encouraging voluntary tion without artificial constraints or supports compliance with law — particularly if those and for suppliers and consumers to exercise walls do not reflect shared values. Building their rights to choose. The problem with the such walls is the technological equivalent of content industry argument is that the ability Prohibition — and will likely be as success- to offer many choices carries with it the abili- ful.†† If our government tells us that we may ty to offer only one choice. In the end, users only use systems that obey the “authorization” are left with the content industry’s promise mandates of others, and those mandates that they will have choices — or with the ignore shared values, many among us may argument that in a world in which distribu- seek to breach the walls in order to act in tion is cheap and perfect price discrimination ways that we have been accustomed to doing, is possible, everyone will be able to obtain and which the law has previously authorized. what they are willing to pay for. But if the If we substitute electronic fences for internal- content industry chooses to offer only one ized values, and technical controls for pub- profit-maximizing option — say, pay-per-view licly created law, we may lose our collective — for all of its cultural artifacts, and if the moral bearings and the considerable benefits of self-enforcement. Instead of enforcing a social bargain designed to encourage both † “[A] bill to change the first sale doctrine . . . is not a modest proposal. It is . . . a major substantive proposal involving a fundamental change in one of the main tenets of copyright law.” Comment of Chairman Kastenmeier at the 1990 Senate †† Following Prohibition, consumers went back to legitimate Judiciary hearings on the Computer Software Rental Amendments (non-bootleg) outlets for liquor because of a desire to ensure Act of 1990, quoted by the ALA in their comments at p. 20. good quality. Raymond James Report.
41 PROMOTING INNOVATION AND ECONOMIC GROWTH
creation and the public access that stimulates exclusive copyright rights, such as the first innovation and economic growth, overuse of sale doctrine and fair use. Routine library DRM (particularly government-mandated practices that are permitted under copyright DRM) may lead to a world where resort to law (such as interlibrary lending, lending for the courts to obtain legal enforcement of classroom or at-home use, archiving and rights becomes the norm and where, as preservation for historical purposes, and Chairman Greenspan described, “our court duplication for fair use purposes) are fre- system would be swamped into immobility quently restricted or barred by licensing and the performance of our economy would agreements. Some first sale/fair uses are con- suffer.” As he observed, “if our market system ditioned by license agreements on payment is to function smoothly, the vast majority of of additional fees — a practice that will trades must rest on mutual trust and only inevitably increase the information-gap indirectly on the law.” † between the rich and the poor. Because our Currently, private DRM discussions and economy is increasingly based on intangible agreements are occurring in a world that is assets, and we are continually growing more based on licensing rather than purchase. As a dependent on access to digital goods con- DRM company executive said recently, “Any trolled via licensing agreements, we need to content company can distribute digital con- be thoughtful as a society about what license tent with any level of protection and any terms are permissible and how they affect the assigned rights of use now, and should be values that underlie our copyright regimes ≠ attempting just that rather than trying to and our democracy. replicate existing business models.” The move Those who advocate the aggressive use of from purchase to license marks a significant DRM argue that there is no right to access change in our relationship to goods. Very few another’s property — no right, for example, consumers read clickwrap agreements in to break into a Border’s bookstore at 3 AM to detail, and none of these agreements are read a book there. But the work we license is negotiable in any real sense.†† Unless the law not locked in the bookstore; DRM operates, provides otherwise, private agreements can as one observer has noted, more like a chain ignore previously defined norms — indeed, locking a work we felt we “owned” to a partic- license agreements could establish outra- ular table; the chain does not allow the work geous norms without our being aware of it, to be shared with a friend, read in a more such as forbidding criticism or parody of the comfortable armchair, or taken to a copy content licensed, or allowing our machines to machine in order to bring an excerpt to be disabled remotely if the license terms were class.§ disobeyed, or permitting detailed review and The existence of private license agree- reporting of private information about the ments containing “unreasonable” terms — user as a condition of access to content. ≠ Consumers obtaining access to digital works Recently, the Federal Circuit’s decision in Bowers v. Baystate Technologies, 01-1108, -1109 (finding that federal copyright law are routinely required to agree to terms that does not preempt a shrink-wrapped contract barring reverse include waiver of long-standing limitations on engineering) has been the subject of great concern. Many pub- lic-interest groups and law professors signed an amicus brief in that case and have petitioned for certiorari, arguing that the decision allows unacceptably broad restraints on reverse engi- † See, Remarks by Chairman Alan Greenspan, “Market neering, fair use, and other limits on copyright, and suggesting Economies and Rule of Law,” at the 2003 Financial Markets that copyright law should preempt contract. Conference of the Federal Reserve Bank of Atlanta, Sea Island, Georgia (April 4, 2003). § Prof. Cohen has argued that the First Amendment supports a “right to read anonymously,” which bars the government from †† Indeed at least one major computer company apparently enacting measures supporting the technological protection does not even package any form of license (hard or soft copy) measures that infringe on such a right. Julie E. Cohen, “A with the software to which these licenses apply. Right to Read Anonymously: A Closer Look at ‘Copyright
42 Discussion of “Solutions” for Digital Copyright Infringement
terms inconsistent with shared values — dire legal consequences, or (more likely) undermines the societal interest in self- widespread remote disabling of the machines enforcing contracts. The self-enforcement upon which we rely. Just as we respect laws aspect of private agreements is essential; after that embody our values, and self-enforce all, voluntary compliance with private agree- (thus avoiding the need for policemen at ments is what makes a society livable. If we every corner), we respect private agreements create a world where license terms do not that are fair and embody good bargains. Self- appear to represent a fair bargain, and are enforcement of private agreements is a socie- contrary to shared values, we are likely to tal benefit and a self-annealing process, and is have built a world where there is little inclina- preferable to strict enforcement by outside tion for voluntary compliance and much parties — or even by the party with technical delight taken in rule-breaking. Such a world control over the machine of a consumer who will be filled with obtuse letters threatening “agreed” to an unreasonable license.
43 PROMOTING INNOVATION AND ECONOMIC GROWTH
VII. FINDING A BETTER PATH
This report has reviewed three significant access to information, and improve prospects trends — the movement from analog to digi- for continued innovation and economic tal information, from physical to intangible growth. goods, and from sale to licensing. We have In attempting to develop a roadmap for examined the development of the copyright ways in which to proceed, we have kept in balance over the years in the face of techno- mind certain principles that have guided logical change, and the challenges these CED over the years. It is important to three trends are now posing to that balance: thoroughly analyze a problem and not to how to provide appropriate incentives for cre- rush to impose a solution without an under- ators when their works may be copied per- standing of its impacts. As with the practice of fectly and distributed widely without signifi- medicine, one should take care first to “do no cant costs, while recognizing societal interests harm.” Relying on market forces is a useful in access to information. We have reviewed starting point, but government has an impor- proposals from the rights-holders to address tant role to play in addressing important these challenges through legal, regulatory, issues, particularly if market solutions are and contractual terms, all of which turn on providing far greater control to rights-holders unlikely to promote fundamental social val- than has been extended in the past. We have ues. Calls for government action are weakest found these proposals flawed in important when the petitioner asks the government to respects. mandate or impose a particular technology But the challenges faced by rights-holders — solutions that are technologically neutral are real. A copyright system is not function- and that utilize sound economic incentives ing if anyone can take a work, copy it perfect- are more likely to work under rapidly chang- ly, and share it freely with two hundred mil- ing technological conditions. Governmental lion people unknown to them without regard action is likelier to succeed if it reflects broad- for the wishes of the rights-holder. ly shared values that commend themselves to We do not believe that the present propos- voluntary compliance. And, finally, proposals als should be adopted. Nor do we believe should be judged with respect to their impact there is presently a perfect alternative solu- on continued innovation and, thus, sustained tion. But we have also reached the view that economic growth — which creates the condi- there are ways of proceeding, and ways not to tions for continued social and cultural proceed, that will allow us to develop a robust progress. solution that will appropriately balance the With these principles in mind — chief rights of creators (both the original and the among them, the desire to promote innova- follow-on creator), continue the leading role tion and sustained economic growth — the played by dynamic high tech industries, Digital Connections Council makes the fol- honor political and social goals of widespread lowing recommendations:
44 RECOMMENDATIONS
1. Because quick legislative or regulatory cessful year in several decades. And the prin- solutions for the problem of digital copy- cipal difference between the music industry’s right protection pose risks to innovation experience and that of the movie industry is and economic growth, and are likely to the enormous bandwidth required to down- have unintended consequences in a period load a digitized movie. While a 56 Kbps con- of rapid technological change, we should nection — now the standard dial-up modem move slowly. Our first concern should be rate — allows a 5MB MP3 audio file to be to “do no harm.” We should dedicate the downloaded in twelve minutes, downloading next two years to attempting to build con- a one-hour video file, even one with VCR sensus about the appropriate role in the quality resolution, would require 20 hours digital age for traditional legal safety over a 56 Kbps connection, and a high-defini- valves that balance the exclusive rights of tion video file would take impossibly long to creators in copyright regimes with users’ download. It is true that the threat to the rights. The Digital Connections Council movie industry will increase with the growth looks forward to facilitating this national of broadband connections in U.S. house- and international dialogue. holds: Home broadband access in the United Proponents of legislative and regulatory States climbed in 2002 by 59 percent over action now argue that we cannot afford to 2001, bringing the total number of U.S. users wait, that we must act now, that the future of who accessed the web via high-speed connec- their entire industries now hang in the bal- tions to more than 33.6 million in December 50 ance, that “[p]rompt action is required to 2002. But even with this growth bandwidth save broadcast television” (or movies, or cable constraints remain: a VCR-quality hour of television). It is clear that the financial results standard (analog) TV would require about of the music distribution industry have four hours to download over a broadband declined over the last three years, but a close connection, but an hour of high definition look at that marketplace reveals a number of digital television would take at least 18 hours significant factors in addition to file sharing to download over a typical cable modem or that may have contributed to this downturn. DSL connection. There is little evidence that Efforts now underway to experiment with dif- people are now sharing movie files online in ferent business models for music distribution large numbers in the way audio files are are gaining ground. And the continued shared. Access to sufficient bandwidth in the growth of other indicators, such as revenues “last mile” to make downloading videos pain- from musical performances, suggests the vital- less is several years away. And, while lagging ity of the music industry as a whole.49 We behind the music industry, the movie industry should not move quickly to change laws or has also begun to experiment with new regulations, being mindful of the first rule to business models. At the same time, industry “do no harm.” efforts to educate consumers about appropri- While the movie industry fears ate conduct and to bring enforcement “Napsterization,” it is coming off its most suc- actions under current law should continue to
45 PROMOTING INNOVATION AND ECONOMIC GROWTH
have a positive impact on consumer The key question that must be answered is behavior.† whether we, as a society, have achieved an We should use this legislative and regulato- appropriate balance. Such a balance must ry moratorium to attempt to build a new con- provide the right incentives to creators to cre- sensus about the basic “safety valves” that bal- ate. But it also must demonstrate a healthy ance the exclusive rights of creators — fair respect for the purposes that copyright has use, first sale, archiving and preservation in a sought to achieve by allowing a means for digital environment. This approach may seem access to copyrighted material — including too slow for some rights-holders whose partic- the ability of individuals to make appropriate ipation in the dialogue is critical. But we private noncommercial uses of copyrighted need to take our time as a society making up material. Such access recognizes the innova- our minds about what policy direction to tive impact of those who build on earlier take. We have moved from a world in which works of creation. For this reason, we should we can think about a physically manifested be careful not to unnecessarily perpetuate work — like a book — to a world of swirling, rules that were created for a world made up undifferentiated bits. When we buy a book, of atoms that were physically distributed. we understand what it is we are doing and what access rights we have to that book. 2. The development and testing of new busi- When we license software, on the other hand, ness models for the distribution of cre- we know less about what this means, and the ative content should be given the highest two parties to the licensing agreement may priority by the content industries. We have wildly different expectations about their should not turn to law or regulation to respective rights, including rights to access or protect any particular business model. duplicate the content. Because we are still It is our belief that that the most impor- uncertain about this new world, we need to tant efforts the content industry can make are think carefully about what we do and, in par- those directed toward the development and ticular, the relation between newly developing testing of new business models for the distri- technological means of control and access bution of creative content. This is not to min- guarantees traditionally found in intellectual imize the need for educational campaigns property laws. about the rights and responsibilities of users, and enforcement — particularly directed † While the recent RIAA suits against several hundred upload- toward large- scale physical duplication of ers have created a public relations furor for the music industry, these suits are appropriate under current law. The RIAA’s tac- recorded media — and development of tech- tics, however, have included use of a section of the DMCA that nical protection measures that can accommo- permits subpoenas to be sent to ISPs for users’ personal infor- mation without review by any judicial officer — and without date consumer expectations such as time- notice to users. Many have recommended that this section of shifting, space-shifting, non-commercial per- the DMCA, Section 512(h), be amended to require user notice sonal copies, and fair use.†† But it is to and judicial review. See, e.g., Alan B. Davidson, Associate Director, Center for Democracy & Technology, Testimony emphasize that the perfect storm threatens before the Senate Committee on Commerce, Science and not creative activity but the current models Transportation, (September 17, 2003.) The U.S. Court of for its commercial distribution. Appeals for the District of Columbia Circuit has recently held that such subpoenas are not permissible under Section 512(h) The best protection of commercial distri- of the DMCA. Recording Industry Association of American, Inc. v. bution plans against the forces of digitization Verizon Internet Services, Inc., U.S. Court of Appeals for the D.C. Circuit, 2003, U.S. App. LEXIS 25735. The RIAA has also been †† Educational campaigns are sorely needed. A recent Business criticized for not checking its facts before sending demand let- Software Alliance study found that nearly two-thirds of college ters; in the last wave of cases, the RIAA went after people who students surveyed said they would download pirated software. had not in fact uploaded music and who were minors. See, “Only a third of those students who have already downloaded
46 Recommendations
— perfect copies, freely distributed — are business plans that recognize these character- “I used to say that the record business was like istics (what some have called the “natural a soft-drink company that sold its products in laws” of the digital economy) and employ nothing but 64-ounce bottles, because our them to better serve customer needs. product was principally the full-length album. Well, thanks to electronic distribution through Business plans that benefit from freely avail- multiple types of networks with varied busi- able copying and distribution are those most ness models, we now have the equivalent of attractive in the emerging economy where cans and six-packs and fountain drinks. “viral marketing” is an accepted norm. Consumers can buy digital music a la carte or Early efforts directed at enforcement or sign up for subscription services offering galvanizing legal or regulatory assistance to unlimited downloads, and they can take their tunes with them wherever they go.” shut down file sharing systems or extend fed- erally approved digital rights management Hillary Rosen, Business 2.0.(a) systems into every possible digital display a. http://www.business2.com/articles/mag/ device seemed to distract the content indus- 0,1640,48572,00.html. try from the development of new business models.51 It is not surprising that there would sequence of studio releases (from theaters to be a reluctance to engage in these experi- video to pay-per-view to television), studios ments because of the risk of undercutting will need to offer faster distribution, directly business models already in place. to consumers. As he put it, “If we don’t pro- But the affected industries are now vide consumers with our product in a timely increasingly engaged in various experiments manner, pirates will.” 52 for digital delivery of their products. As According to the head of the Recording Michael Eisner, CEO of Disney, a strong pro- Industry Association of America, some of the ponent of technical mandates, recently told new models are gaining traction. It is clear the National Association of Broadcasters that the new models have begun to accommo- annual convention, Disney will utilize the date customer expectations, moving in the fullest range of digital technologies, while direction of lower prices, wider choice of recognizing the threats they pose — and will music, the ability to make copies of music even rethink its current business models. In that is downloaded, and even to burn down- the future, Eisner said, movie studios will loaded music into a physical medium. Apple’s need to be more flexible about the way they iTunes Music Store, providing music down- distribute movies. In place of the current loads from a large library of songs, processed as many downloads on its opening day in May 2003 as had been collectively requested from “The best way to combat piracy is to remove the other competing download services over a the incentive by providing a better alterna- six-month period — more than 200,000.53 † tive. The vast majority of us pay for Internet During the last week of December 2003 access. You can get it for free, but you have to alone, 1.9 million songs were downloaded live with pop-up ads and limitations. Only a tiny fraction of the public does that. We pay from iTunes – a rate of 100 million down- for Internet access because we cannot abide the annoyances. The renegade (file-sharing) † The system allows sharing across three authorized Macs, and unlimited sharing among CDs and iPods that are pre-author- networks have an abundance of pop-up ads, ized. Id. Because Macintosh users represent only about 3 per- spyware, decoy files, viruses and sporadic cent of the PC market, usage numbers will be even larger now crashes.” that a Windows version has come out. Facing competition from the iTunes service, Listen.com will lower the price to download Phil Leigh of Raymond James and Associates, songs from its Rhapsody music service by 20 cents to 79 cents, quoted in USA Today, May 6, 2003. marking the latest move by paid music services to attract and retain new ears.
47 PROMOTING INNOVATION AND ECONOMIC GROWTH
loads per year. Thirty million songs were demonstrate.†† In the music business, “cheap downloaded from iTunes between its May and great” is likely to be at least as attractive introduction and the end of 2003.54 † The to consumers as “free and crummy.” Many reasons for the Music Store’s popularity are analysts believe that the prospects for a rein- many. Rather than streaming music, it offers vented music industry are quite positive. all the songs available for download from the There is nothing to indicate any lessening of big-five record labels for $.99 each — and is interest in listening to music; the very success very easy to use.55 Users can save downloaded of Napster and its decentralized descendents tracks on multiple devices, and can copy belie any such trend. Paradoxically, given the music onto their own CDs — allowing time- perceived threat of computer copying and and space-shifting. Even iTunes has limita- distribution of music, listening to music on a tions, because its inventory is not exhaustive computer is one of the few things that can be and users cannot take songs and convert done while surfing the Internet — and more them directly into MP3 formats. But a version and more people are spending more and of iTunes for Windows has been released, and more time online. And as the explosion of take-up of paid-for downloading is likely to portable music devices has demonstrated over continue. Further experimentation will the last four years, a market exists for music undoubtedly explore different forms of fund- on the move — delivered by satellite, carried ing support such as subscriptions, advertising, on a memory stick, or burned onto a “mix.”57 and promotional funding, as well as different One powerful positive force supporting means of competing with the free downloads these new models is the fact that online offer- available through file sharing services by ings provide far greater choices of music for providing newly released music, concert tick- customers everywhere than is available from et tie-ins, authenticated copies, and other physical outlets. The rise of mass-market services. retailers has tended to reduce access to a At the same time, new competition to the existing distribution channels is developing as artists explore use of peer-to-peer file sharing “The best technical protection model is a networks to sell music directly to their fans. better business model.” KazAa, where at any moment four million users are sharing some 800 million files, will Joan Feigenbaum of Yale University at offer rapper Ice T’s new album Repossession Berkeley DRM conference. for $4.99 over a secure platform. According to the rapper, “With technology today, artists don’t need to rely on the working of a tradi- broader range of music (while generally put- tional label to get their music to consumers, ting downward pressure on prices). Even and without the label being in the middle to music megastores, generally located in urban get a stake, it enables artists like myself to areas, have a stock that is a small fraction of generate more revenue through selling prod- the virtually unlimited choice of music avail- uct ourselves.”56 able online regardless of the customer’s loca- Thus, as the content industry is finding, tion. It is estimated that approximately one there are ways to compete with “free” — as out of five customers leaves a music store the ever-increasing number of people carry- without purchasing anything because of inad- ing around bottles of purchased spring water equate selection or availability — a problem
† See also, Apple, “iTunes Music Store Sells Ten Millionth †† In 2001, US sales of bottled water, which are expected to Song,” (press release, Cupertino, California, September 8, pass sales of coffee and milk by 2004, were $6.5 billion. Bottled 2003) available at
48 Recommendations
not faced by the online distributor whose system, it is likely that artists will seek a inventory costs are, at the same time, much greater share of the revenues; music publish- lower.58 ers who hold rights to songs themselves are In light of the fear of cannibalization of already seeking high returns for use of their existing markets, the experience of Amazon rights. Even given increases in monies owed in expanding the market for books is illustra- to music publishers and in marketing costs, tive. While approximately 60 percent of its the reduction or elimination of manufactur- sales cannibalize sales of existing bookstores, ing and distribution costs (the largest catego- approximately 40 percent of its sales are addi- ry of capital expenses for recorded music), as tive.† Most of the music available in stores well as reductions in the costs associated with customer transactions, inventories, and returns, increases the chances that successful “The business model for the record labels has business models can be created based on collapsed. Nobody wants to steal anything so lower revenues — enabling offerings that can long as there is a reasonable way to buy it at more easily compete with free file-sharing a fair price. The music industry has not caught 59 up fast enough with the demands of the market.” services. We believe there is a strong likelihood that Kunitake Ando, President Sony Corporation, customers will find easily searchable, high December 2002, quoted on cover of Digital Media/Raymond James report. quality, downloadable, value-laden content worth paying for online. Labels will continue to be seen as indicators of value when con- today is in the form of new releases — what is sumers are looking for works; labels will pro- referred to as “front catalog” — and more vide added value by “filtering” the vast than half the sales are from this catalog. Yet amounts of music available due to the low 30-40 percent of sales are already from “back cost of putting new music online and market- catalog” — a figure likely to expand with ing particular customized selections to cus- greater availability of items online, combined tomers. Consumers have already invested con- with preference-based recommendations and siderable amounts to be able to enjoy the cre- intelligent agents available to assist online ative content of their choice and are likely to customers. (Webnoize found that Napster’s go to a legitimate source of content if they greatest attraction was the vast choice of feel they are getting good value. Consumers music available to users.)†† do not want to face the vagaries of slower, New devices are likely also to increase the more inaccurate, and less secure services. market for music on the move. Cell phones Content distributors are well placed to pro- have already created a market for ring tones. vide services of greater value. The Digital New mobile devices coming to market will Connections Council encourages further make it easier to download music over new movement in this direction. higher bandwidth mobile services. Changes in relationships among the vari- 3. Existing solutions to the issue of unautho- ous players in the value chain are likely as rized uses, such as enforcement and edu- technology improves and as greater band- cation, should continue to be explored. width in the “last mile” is available. Given the Current copyright law provides rights- threat of disintermediation of the distribution holders with very significant enforcement tools. The Copyright Act allows for substantial ≠ † Artists who allowed free downloads increased sales by 40%. civil penalties and criminal remedies. We see Merrill Lynch Report, p.130. ≠ Where a copyright is registered in a timely fashion, a court †† The most popular response by respondents was breadth of has the discretion to award statutory damages of up to $30,000 choice; the second most popular choice was instant gratifica- for each copyrighted work infringed. If the infringement was tion; third was “free.” Raymond James Report, p.7. willful, the court can award statutory damages up to $150,000.
49 PROMOTING INNOVATION AND ECONOMIC GROWTH
no reason why the content industry should inhibiting unauthorized uses of materials. not use these tools; particularly as the great- During this period of consensus building est threats to industry revenues (up to two- about “safety valves” in intellectual prop- thirds of all loses due to piracy) are from erty law, we encourage continued experi- commercially driven pirates duplicating mentation in private DRM systems. In par- physical media such as tapes and CDs. Such ticular, the capacity of such systems to large-scale offenders should be the subjects of accommodate users’ rights traditionally lawsuits — and we do not think that the con- allowed under intellectual property law tent industry will alienate the mass market by needs to be further explored so that the going after true pirates.† appropriate copyright balance can be Education about the rationale for copy- maintained. If government-mandated sys- right has taken on a new prominence in the tems are proposed, they should be evaluat- work of trade associations as file sharing by ed on the basis of their capability to main- consumers has exploded. It is an important tain such a balance and their convenience response and is likely to have a positive for consumers. Consumers should play a effect.†† When taken together with well-publi- substantial role in evaluating and approv- cized enforcement actions, we think educa- ing mandated technological protection tion may be more effective than it has been systems. in the past— particularly if attractive, legal, Some DRM developments are crucial for alternative sources for content exist beyond any system that needs to monitor use of copy- Napster and its progeny. righted digital information in order to pro- vide rewards for rights-holders; other forms 4. We recognize the need for digital rights of DRM may be quite useful in enabling management (DRM) systems that will rights-holders to allow multiple choices for allow creators to be rewarded for their the use of content in response to differing efforts. We are skeptical about govern- customer needs. But we also need to think ment-mandated DRM, and we recommend carefully about the ability of DRM systems to that manufacturers not be required to prevent what has previously been viewed as build in mandated copy protection tech- legitimate access to information, and to tech- nologies. But DRM systems provide a use- nically enforce rules that would prevent ful “speed bump” for consumers by reverse engineering or criticism of a product.
† In recent months, the RIAA has initiated legal enforcement Most importantly, we must understand the actions against actively pursued hundreds of individuals ability of DRM systems not only to protect uploading very large numbers of files to peer-to-peer networks. copyrighted materials from unauthorized use As Alan Davidson of the Center for Democracy and Technology recently stated, “While enforcement action is but also their ability to technically accommo- unpopular, it is necessary and preferable to the alternatives. ... date those aspects of copyright that provide It is unhealthy for our country, and unfair to copyright hold- “safety valves” that release the pressure of ers, for large numbers of people to routinely violate the law of the land.” Davidson, testimony before the Senate Committee rights-owner control. And consumers need on Commerce, Science, and Transportation, hearing on to be part of these ongoing discussions and Consumer Privacy and Government Technology Mandates in the Digital Media Marketplace, September 17, 2003. evaluations. We have attempted to focus on the ques- †† The RIAA has recently mounted an education campaign tion of whether there is a way for technology aimed at school children that involves a game called “Starving Artist,” in which students come up with an idea for a record to accommodate what the law has previously album, cover art, and lyrics. After this exercise is completed, a recognized as existing patterns of reasonable teacher tells them that the album is already available for down- consumer uses. It is even more difficult for load for free. According to the New York Times, the teacher would then “ask them how they felt when they realized that technology to accommodate the unknown — their work was stolen and that they would not get anything for the new, as-yet-undiscovered reasonable uses their efforts.” Laura Holson, “Studios Moving to Block Piracy enabled as new technologies emerge. This of Films Online,” The New York Times, September 25, 2003.
50 Recommendations
latter task may be impossible. But what we tract. It is a matter of collective consensus have learned from our experience with the (now embodied in copyright law) about the Internet — an experimental laboratory for reasonableness of particular choices to use the creativity of half a billion users — is that content in particular ways. It is not a matter the best rules are those that allow for the of neutral enforcement by the state of a pri- possibility of presently uncontemplated uses. vate party’s decisions to exclude others from Given the risks to innovation posed by access. (Nor is it a matter of giving all parties DRM, our current belief is that the law that get access to a particular thing the right should apply the first sale and fair use doc- to deal with it as they see fit.) And, in order trines to digital content regardless of the digi- for a stable and self-enforcing intellectual tal rights management scheme imposed by property regime to exist, the social contract the rights-holder. These rights should not be must be one that reflects our collective views. ignored simply because technology makes it Having “no fair use” as the default setting possible to ignore them. At the same time, does not reflect the bargain that has histori- the law should not permit anyone to make cally been struck —- and there is no indica- and distribute unauthorized copies of digital tion that a new bargain has gained societal content to the public — simply because tech- acceptance. nology makes this possible. The problem, of course, is that unless fair We think this approach is appropriate use is specified in some binary way there is no (and necessary) for several reasons. First, fair way to incorporate it into any digital rights use is an inherently subjective, case-by-case, management system. No DRM scheme we fact-specific inquiry. No one knows in know about can simultaneously protect advance that any particular use of content is against unauthorized uses and allow individ- assuredly fair. For this reason, many believe it ual overrides whenever the user feels that is impossible to completely “code” fair use. what he or she is doing is reasonable. An Allowing a 30-second snippet to be emailed alternative might provide for coding in gener- to a friend is likely to be appropriate fair use al rules that would likely accommodate a of a two-hour movie (or might not, depend- majority of situations that all parties would ing on circumstances), but probably would agree would meet the fair use tests; but such not be fair use of a 30-second independent a system would not likely cover all fair uses, film short. Second, if someone overcame the and would certainly not accommodate new difficult problems of coding in fair use as it is reasonable uses that emerge with technologi- now, they might inadvertently cause future cal progress. While such coding might pro- reasonable uses to be blocked. “Coding in” vide a “floor” for fair use, it is equally possible fair use might itself stifle innovation. that it would become a “ceiling.” This dilem- Because it is difficult — perhaps impossi- ma suggests the importance of providing a ble — to “code” fair use, some have argued role for the courts to ensure (in a case by that DRM systems should not have to accom- case fashion) that the law reflects evolving modate the purposes underlying fair use and practices. first sale, and thus should be able to block The Digital Connections Council realizes reasonable consumer uses (such as emailing a that rights-holders are anxious to have gov- program to a friend). But claiming that it is ernment mandated and private DRM regimes “too difficult” is not a sufficient answer. Such in place and is sympathetic to their concerns an answer removes the incentives to over- and the threats they face from unauthorized come the problem from the party who, seek- digital copying and distribution. As a society, ing societal protection, has the greatest incen- we could respond by greatly increasing the tive to solve it. Moreover, protection of intel- control offered to the rights-holder by man- lectual property is inherently a social con- dating DRM systems that do not allow “wiggle
51 PROMOTING INNOVATION AND ECONOMIC GROWTH
room” for existing or new uses of content. Or ments — perhaps even micropayments — we could prevent the imposition of new costs made by downloaders to appropriate recipi- on the follow-on innovator and the narrowing ents. The valuation and allocation questions of the public domain that would result from posed by such proposals are very difficult, but such a mandate by requiring that DRM sys- that should not mean that discussion of these tems be evaluated in light of their effect on models never takes place. The Digital the existing balance between creators’ rights Connections Council encourages relevant and public rights. stakeholders to look at alternative models. One other point needs to be made about Such models may include historical ideas that this choice. At present the Digital Millennium emerged out of periods of technological Copyright Act prohibits the circumvention of change, as well as new models that can be effective technological protection mecha- considered today only because of technical nisms. The effect of this prohibition is to pro- developments.† tect material that may not be copyrightable Similarly, it may be possible to broaden and, more importantly, to bar access to copy- the public domain. Should economic incen- rightable material even for purposes that tives be created to encourage rights-holders would clearly be considered fair use. As we to dedicate their content to the public before consider the future role of digital rights man- their statutory term of copyright protection agement systems, we should consider how to expires? It is beyond question that most of ensure that courts are empowered to protect the value of a copyrighted work resides in its fair, private, noncommercial uses, even in the use in the early years of its copyright protec- presence of such systems. tion.†† Might it be in the public interest to require some low-cost renewal process that 5. Market-based economic tools that provide would encourage rights-holders to decide incentives for copyright-holders to facili- whether to continue to assert their copyright tate follow-on innovation should be con- rights or to allow the work to enter the public sidered—including measures to provide domain? Such a proposal would, at the least, earlier dedication of copyrighted materials allow interested parties to know who holds to the public domain. the rights in a particular work of authorship. We should not necessarily be constrained At the present time, the costs involved in by the current policy debate as we seek to making this determination create obstacles to resolve the “digital dilemma.” It may be that works being used by follow-on innovators. different incentives for copyright-holders will Such a renewal proposal would not fix the provide the encouragement authors need to digital dilemma, but might contribute to a continue to create, while protecting the broadening of materials available to society as future of innovation and the public domain. a whole. For example, indirect subsidies of some kind — in exchange for a form of “compulsory † For example, the BBC recently announced that they would license” allowing unfettered use of content — embrace Napster-like file sharing to make their archives free should be explored. It may be possible to for those who paid a nominal license. The Guardian, August 28, 2003. create a collective rights association on the ASCAP/BMI model that can allocate pay- †† See Economists’ Brief.
52 CONCLUSION
We are sympathetic to the problems con- Given CED’s mandate, the Digital fronting the content distribution industry. It Connections Council has attempted to exam- is beyond question that this industry faces ine the current digital copyright issues within real problems that deeply affect its future. the context of concern for the overall eco- But these problems — perfect copies of high- nomic health of this country. We believe this value digital works being transmitted instantly economic perspective — and in particular an around the world at almost no cost — require understanding of the sequential nature of clear, concentrated thinking, rather than innovation — has not been adequately taken quick legislative or regulatory action. As into account in the public debate. We also Thomas Edison said: “There is time for every- believe it is not too late for thoughtful discus- thing.” Given the present limitations on sion to find solutions that will prove broadly bandwidth, the immaturity of many technical acceptable and encourage self-enforcement protection systems, and the inevitable unfore- rather than an increase in litigation or regula- seen consequences of governmental actions, tion. It will be essential for thoughtful and there is time to lay a stable foundation for inventive key stakeholders to sit down togeth- intellectual property rules in the digital er to work through these problems. The world. Digital Connections Council looks forward to joining in such discussions and hopes this report will provide a helpful perspective.
53 PROMOTING INNOVATION AND ECONOMIC GROWTH
ENDNOTES
1. Remarks by Chairman Alan Greenspan, “Market Economies 19. Gretchen Hyman, “File-Swapping Site Grows by 300 and Rule of Law,” at the 2003 Financial Markets Conference of Percent,” Websense Inc., January 23, 2003, available at the Federal Reserve Bank of Atlanta, Sea Island, Georgia
54 Endnotes
37. Second Report and Order and Second Further Notice of 47. ALA, Comments on DMCA, (August 4, 2000) available at Proposed Rulemaking, Implementation of Section 304 of the
55 OBJECTIVES OF THE COMMITTEE FOR ECONOMIC DEVELOPMENT
For 60 years, the Committee for Economic foundations, and individuals. It is independ- Development has been a respected influence ent, nonprofit, nonpartisan, and nonpolitical. on the formation of business and public policy. Through this business-academic partner- CED is devoted to these two objectives: ship, CED endeavors to develop policy state- To develop, through objective research and ments and other research materials that com- informed discussion, findings and recommenda-tions mend themselves as guides to public and busi- for private and public policy that will contribute to ness policy; that can be used as texts in college preserving and strengthening our free society, achiev- economics and political science courses and in ing steady economic growth at high employment and management training courses; that will be con- reasonably stable prices, increasing productivity and sidered and discussed by newspaper and maga- living standards, providing greater and more equal zine editors, columnists, and commentators; opportunity for every citizen, and improving the and that are distributed abroad to promote quality of life for all. better understanding of the American eco- To bring about increasing understanding by pres- nomic system. ent and future leaders in business, government, and CED believes that by enabling business lead- education, and among concerned citizens, of the ers to demonstrate constructively their concern importance of these objectives and the ways in which for the general welfare, it is helping business to they can be achieved. earn and maintain the national and communi- CED’s work is supported by private volun- ty respect essential to the successful function- tary contributions from business and industry, ing of the free enterprise capitalist system.
56 CED BOARD OF TRUSTEES
Chairman DEREK BOK, President Emeritus STEPHEN A. CRANE, Chairman, Harvard University President and Chief Executive Officer ROY J. BOSTOCK, Chairman Emeritus, National Chair, Common Cause Stirling Cooke Brown Holdings Limited Executive Committee Bcom3 Group, Inc. LEE C. BOLINGER, President W. BOWMAN CUTTER, Managing Columbia University Director Warburg Pincus Vice Chairmen JACK O. BOVENDER, JR., Chairman and Chief Executive Officer PAUL DANOS, Dean GEORGE H. CONRADES, Chairman and HCA Inc. The Amos Tuck School of Business Chief Executive Officer Dartmouth College Akamai Technologies, Inc. JOHN BRADEMAS, President Emeritus New York University RONALD R. DAVENPORT, Chairman of JAMES A. JOHNSON, Vice Chairman the Board Perseus, LLC JOSEPH BRANDON, Chairman, Sheridan Broadcasting Corporation President and Chief Executive Officer ARTHUR F. RYAN, Chairman and Chief General RE Corporation JOHN J. DEGIOIA, President Executive Officer Georgetown University The Prudential Insurance Company of ROBERT H. BRUININKS, President America University of Minnesota ROBERT M. DEVLIN, Chairman Curragh Capital Partners FREDERICK W. TELLING, Vice President MICHAEL BUNGEY, Chief Executive Corporate Strategic Planning and Policy Officer JOHN DIEBOLD, Chairman Division Cordiant Communications Group John Diebold Incorporated Pfizer Inc. * FLETCHER L. BYROM, President and SAM DIPIAZZA, Global Chief Executive Chief Executive Officer PricewaterhouseCoopers MICASU Corporation REX D. ADAMS, Professor of Business LINDA M. DISTLERATH, Vice President, Administration DONALD R. CALDWELL, Chairman and Global Health Policy The Fuqua School of Business Chief Executive Officer Merck & Co., Inc. Duke University Cross Atlantic Capital Partners IRWIN DORROS, President PAUL A. ALLAIRE, Retired Chairman DAVID A. CAPUTO, President Dorros Associates Xerox Corporation Pace University * FRANK P. DOYLE, Retired Executive HERBERT M. ALLISON, JR., Chairman FRANK C. CARLUCCI, Chairman Vice President and Chief Executive Officer Emeritus General Electric Company TIAA-CREF The Carlyle Group ROBERT H. DUGGER, Managing COUNTESS MARIA BEATRICE ARCO, RAYMOND G. CHAMBERS, Chairman Director Partner of the Board Tudor Investment Corporation American Asset Corporation Amelior Foundation PHILIP DUKE, Executive Vice President, IAN ARNOF, Retired Chairman ROBERT CHESS, Chairman Retired Bank One, Louisiana, N.A. Nektar Therapeutics Lockheed Martin Corporation
MERRILL J. BATEMAN, Former MICHAEL CHESSER, Chairman and FRANK DUNN, President and Chief President Chief Executive Officer Executive Officer Brigham Young University Great Plains Energy Nortel Networks
JAMES S. BEARD, President CAROLYN CHIN, Chairman T. J. DERMOT DUNPHY, Chairman Caterpillar Financial Services Corp. Commtouch/C3 Partners Kildare Enterprises, LLC
THOMAS D. BELL, JR., Vice Chairman, * JOHN L. CLENDENIN, Retired RAY DURKEE, Vice President, Sales and President and Chief Executive Officer Chairman Account Management Cousins Properties BellSouth Corporation Kaiser Foundation Health Plan, Inc.
ALAN BELZER, Retired President and FERDINAND COLLOREDO-MANSFELD, CHRISTOPHER D. EARL, Managing Chief Operating Officer Chairman and Chief Executive Officer Director AlliedSignal Inc. Cabot Properties, Inc. Perseus Capital, LLC
PETER A. BENOLIEL, Chairman, JAMES P. CORCORAN, Consultant W. D. EBERLE, Chairman Executive Committee Manchester Associates, Ltd. Quaker Chemical Corporation DAVID M. COTE, President and Chief Executive Officer ROBERT A. ESSNER, Chairman, MELVYN E. BERGSTEIN, Chairman and Honeywell International Inc. President and Chief Executive Officer Chief Executive Officer Wyeth Diamond Cluster International, Inc.
*Life Trustee DIANA FARRELL, Director RONALD GRZYWINSKI, Chairman PRES KABACOFF, President and McKinsey Global Institute Shorebank Corporation Co-Chairman Historic Restoration, Inc. G. STEVEN FARRIS, President, Chief JUDITH H. HAMILTON, Former Executive Officer and Chief Operating President and Chief Executive Officer EDWARD A. KANGAS, Chairman and Officer Classroom Connect Chief Executive Officer, Retired Apache Corporation Deloitte Touche Tohmatsu WILLIAM A. HASELTINE, Chairman and KATHLEEN FELDSTEIN, President Chief Executive Officer JOSEPH E. KASPUTYS, Chairman, Economics Studies, Inc. Human Genome Sciences, Inc. President and Chief Executive Officer Global Insight, Inc. E. JAMES FERLAND, Chairman, WILLIAM HENDERSON President and Chief Executive Officer Former Postmaster General WILLIAM E. KIRWAN, Chancellor Public Service Enterprise Group Inc. University System of Maryland RICHARD H. HERSH, President * EDMUND B. FITZGERALD, Managing Trinity College THOMAS J. KLUTZNICK, President Director Thomas J. Klutznick Company Woodmont Associates HEATHER HIGGINS, President Randolph Foundation CHARLES E.M. KOLB, President HARRY L. FREEMAN, Chair Committee for Economic Development The Mark Twain Institute RODERICK M. HILLS, Chairman Hills & Stern, LLP EDWARD M. KOPKO, Chairman, MITCHELL S. FROMSTEIN, Chairman President and Chief Executive Officer Emeritus HAYNE HIPP, President and Chief Butler International Manpower Inc. Executive Officer The Liberty Corporation C. JOSEPH LABONTE, Chairman PAMELA B. GANN, President The Vantage Group Claremont McKenna College PAUL M. HORN, Senior Vice President, Research BENJAMIN LADNER, President JOSEPH GANTZ, Partner IBM Corporation American University GG Capital, LLC MATINA S. HORNER, Retired Executive KURT M. LANDGRAF, President and E. GORDON GEE, Chancellor Vice President Chief Executive Officer Vanderbilt University TIAA-CREF Educational Testing Service
THOMAS P. GERRITY, Dean Emeritus PHILIP K. HOWARD, Vice Chairman ROBERT W. LANE, Chairman and The Wharton School Covington & Burling Chief Executive Officer University of Pennsylvania Deere & Company ROBERT J. HURST, Vice Chairman FREDERICK W. GLUCK, Of Counsel The Goldman Sachs Group, Inc. W. MARK LANIER, Partner McKinsey & Company, Inc. The Lanier Law Firm, P.C. SHIRLEY ANN JACKSON, President CAROL R. GOLDBERG, President Rensselaer Polytechnic Institute WILLIAM W. LEWIS, Director Emeritus The AvCar Group, Ltd. McKinsey Global Institute WILLIAM C. JENNINGS, Chairman McKinsey & Company, Inc. ALFRED G. GOLDSTEIN, President and US Interactive, Inc. Chief Executive Officer IRA A. LIPMAN, Chairman of the Board AG Associates JEFFREY A. JOERRES, President and and President Chief Executive Officer Guardsmark, LLC JOSEPH T. GORMAN, Retired Chairman Manpower Inc. TRW Inc. BRUCE K. MACLAURY, President L. OAKLEY JOHNSON, Senior Vice Emeritus EARL G. GRAVES, SR., Publisher and President, Corporate Affairs The Brookings Institution Chief Executive Officer American International Group Black Enterprise Magazine COLETTE MAHONEY, President ROBERT M. JOHNSON, Chairman and Emeritus WILLIAM H. GRAY, III, President and Chief Executive Officer Marymount Manhattan College Chief Executive Officer Bowne & Co., Inc. The College Fund EDWARD A. MALLOY, President MARK JOINER, Senior Vice President University of Notre Dame GERALD GREENWALD, Managing and Director Partner Boston Consulting Group ELLEN R. MARRAM, Partner Greenbriar Equity Group North Castle Partners VAN E. JOLISSAINT, Corporate BARBARA B. GROGAN, President Economist, Retired T. ALLAN MCARTOR, Chairman Western Industrial Contractors DaimlerChrysler Corporation Airbus Industrie of North America, Inc.
PATRICK W. GROSS, Chairman, H.V. JONES, Managing Director ALONZO L. MCDONALD, Chairman The Lovell Group Korn/Ferry International and Chief Executive Officer Founder, AMS Avenir Group, Inc. ROBERT JOSS, Dean JEROME H. GROSSMAN, M.D., Graduate School of Business DAVID E. MCKINNEY, President Senior Fellow Stanford University The Metropolitan Museum of Art John F. Kennedy School of Government Harvard University
*Life Trustee ALAN MERTON, President NED REGAN, President JOHN F. SMITH, JR., Chairman George Mason University Baruch College General Motors Corporation
DEBORAH HICKS MIDANEK, Principal JAMES Q. RIORDAN, Chairman DAVID A. SPINA, Chairman and Chief Glass & Associates, Inc. Quentin Partners Co. Executive Officer State Street Corporation HARVEY R. MILLER, Managing Director E. B. ROBINSON, JR., Chairman, Retired Greenhill & Co., LLC Deposit Guaranty Corporation ALAN G. SPOON, Managing General Partner ALFRED T. MOCKETT, Chairman and JAMES D. ROBINSON, III, General Polaris Ventures Chief Executive Officer Partner and Founder American Management Systems, Inc. RRE Ventures PAULA STERN, President The Stern Group, Inc. NICHOLAS G. MOORE, Senior Advisor ROY ROMER Bechtel Corporation Former Governor of Colorado DONALD M. STEWART, President and Superintendent, Los Angeles Unified Chief Executive Officer IKUO MORI, Chairman and School District The Chicago Community Trust Chief Executive Officer Daiwa Securities America Inc. DANIEL ROSE, Chairman ROGER W. STONE, Chairman and Chief Rose Associates, Inc. Executive Officer DIANA S. NATALICIO, President Box USA Group, Inc. The University of Texas at El Paso HOWARD M. ROSENKRANTZ, Chief Executive Officer MATTHEW J. STOVER, President MATTHEW NIMETZ, Partner Grey Flannel Auctions LKM Ventures General Atlantic Partners LANDON H. ROWLAND, Chairman LAWRENCE SUMMERS, President DEAN R. O’HARE, Chairman and Chief Janus Capital Group Inc. Harvard University Executive Officer, Retired Chubb Corporation NEIL L. RUDENSTINE, Chair, ArtStor RICHARD J. SWIFT, Chairman, President Advisory Board and Chief Executive Officer, Retired RONALD L. OLSON, Partner The Andrew Mellon Foundation Foster Wheeler Corporation Munger, Tolles & Olson GEORGE RUPP, President RICHARD F. SYRON, Chairman and NOBUHARU ONO, President, and International Rescue Committee Chief Executive Officer Chief Executive Officer Freddie Mac NTT DoCoMo USA EDWARD B. RUST, JR., Chairman and Chief Executive Officer HENRY TANG, Chairman STEFFEN E. PALKO, Vice Chairman and State Farm Insurance Companies Committee of 100 President XTO Energy, Inc. ARTHUR F. RYAN, Chairman FREDERICK W. TELLING, Ph.D. and Chief Executive Officer Vice President Corporate Strategic SANDRA PANEM, Partner Prudential Insurance Company Planning and Policy Division Cross Atlantic Partners, Inc. of America Pfizer Inc.
JERRY PARROTT, Vice President, BERTRAM L. SCOTT, President JAMES A. THOMSON, President and Corporate Communications TIAA-CREF Life Insurance Company Chief Executive Officer Human Genome Sciences, Inc. RAND JOHN E. SEXTON, President CAROL J. PARRY, President New York University STOKLEY P. TOWLES, Partner Corporate Social Responsibility Associates Brown Brothers Harriman & Co. DONNA SHALALA, President VICTOR A. PELSON, Senior Advisor University of Miami STEPHEN JOEL TRACHTENBERG, UBS Warburg LLC President JUDITH SHAPIRO, President The George Washington University DONALD K. PETERSON, President and Barnard College Chief Executive Officer TALLMAN TRASK, III, Executive Avaya Inc. WALTER H. SHORENSTEIN, Chairman Vice President of the Board Duke University PETER G. PETERSON, Chairman The Shorenstein Company The Blackstone Group JAMES L. VINCENT, Chairman, Retired * GEORGE P. SHULTZ, Distinguished Biogen, Inc. TODD E. PETZEL, President Fellow Azimuth Alternative Asset The Hoover Institution FRANK VOGL, President Management LLP Stanford University Vogl Communications
RAYMOND PLANK, Chairman JOHN C. SICILIANO, Director, Global DONALD C. WAITE, III, Director Apache Corporation Institutional Services McKinsey & Company, Inc. Dimensional Fund Advisors HUGH B. PRICE, Of Counsel HERMINE WARREN, President Piper Rudnick LLC RUTH J. SIMMONS, President Hermine Warren Associates, Inc. Brown University GEORGE A. RANNEY, JR., President and JERRY D. WEAST, Superintendent of Chief Executive Officer FREDERICK W. SMITH, Chairman, Schools Chicago Metropolis 2020 President and Chief Executive Officer Montgomery County Public Schools Federal Express Corporation
*Life Trustee ARNOLD R. WEBER, President Emeritus MARGARET S. WILSON, Chairman and RONALD L. ZARRELLA, Chairman and Northwestern University Chief Executive Officer Chief Executive Officer Scarbroughs Bausch & Lomb, Inc. JOSH S. WESTON, Honorary Chairman Automatic Data Processing, Inc. JACOB J. WORENKLEIN, President and STEVE ZATKIN, Senior Vice President Chief Executive Officer Government HAROLD M. WILLIAMS, President US Power Generating Company Emeritus MARTIN B. ZIMMERMAN, Vice The J. Paul Getty Trust NANCY WYSENSKI, President and President, Corporate Affairs Chief Executive Officer Ford Motor Company L. R. WILSON, Chairman EMD Pharmaceuticals Nortel Networks Corporation EDWARD ZORE, President and Chief KURT E. YEAGER, President and Chief Executive Officer LINDA SMITH WILSON, President Executive Officer The Northwestern Mutual Life Emerita Electric Power Research Institute Insurance Co. Radcliffe College
*Life Trustee CED HONORARY TRUSTEES
RAY C. ADAM, Retired Chairman ROBERT R. DOCKSON, Chairman ROBERT W. LUNDEEN, Retired NL Industries Emeritus Chairman CalFed, Inc. The Dow Chemical Company ROBERT O. ANDERSON, Retired Chairman LYLE EVERINGHAM, Retired Chairman RICHARD B. MADDEN, Retired Hondo Oil & Gas Company The Kroger Co. Chairman and Chief Executive Officer Potlatch Corporation ROY L. ASH THOMAS J. EYERMAN, Retired Partner Los Angeles, California Skidmore, Owings & Merrill AUGUSTINE R. MARUSI Lake Wales, Florida SANFORD S. ATWOOD, President DON C. FRISBEE, Chairman Emeritus Emeritus PacifiCorp WILLIAM F. MAY, Chairman and Chief Emory University Executive Officer RICHARD L. GELB, Chairman Emeritus Statue of Liberty-Ellis Island Foundation, ROBERT H. B. BALDWIN, Retired Bristol-Myers Squibb Company Inc. Chairman Morgan Stanley Group Inc. W. H. KROME GEORGE, Retired OSCAR G. MAYER, Retired Chairman Chairman Oscar Mayer & Co. GEORGE F. BENNETT, Chairman ALCOA Emeritus GEORGE C. MCGHEE, Former U.S. State Street Investment Trust WALTER B. GERKEN, Retired Chairman Ambassador and Under Secretary and Chief Executive Officer of State HAROLD H. BENNETT Pacific Life Insurance Company Salt Lake City, Utah JOHN F. MCGILLICUDDY, Retired LINCOLN GORDON, Guest Scholar Chairman and Chief Executive Officer JACK F. BENNETT, Retired Senior The Brookings Institution Chemical Banking Corporation Vice President Exxon Corporation JOHN D. GRAY, Chairman Emeritus JAMES W. MCKEE, JR., Retired Chairman Hartmarx Corporation CPC International, Inc. HOWARD W. BLAUVELT Keswick, Virginia RICHARD W. HANSELMAN, Chairman CHAMPNEY A. MCNAIR, Retired Health Net Inc. Vice Chairman MARVIN BOWER Trust Company of Georgia Delray Beach, Florida ROBERT S. HATFIELD, Retired Chairman J. W. MCSWINEY, Retired Chairman ALAN S. BOYD The Continental Group, Inc. of the Board Lady Lake, Florida The Mead Corporation ARTHUR HAUSPURG, Member, Board ANDREW F. BRIMMER, President of Trustees ROBERT E. MERCER, Retired Chairman Brimmer & Company, Inc. Consolidated Edison Company of The Goodyear Tire & Rubber Co. New York, Inc. PHILIP CALDWELL, Retired Chairman RUBEN F. METTLER, Retired Chairman Ford Motor Company PHILIP M. HAWLEY, Retired Chairman and Chief Executive Officer of the Board TRW Inc. HUGH M. CHAPMAN, Retired Chairman Carter Hawley Hale Stores, Inc. NationsBank South LEE L. MORGAN, Former Chairman ROBERT C. HOLLAND, Senior Fellow of the Board E. H. CLARK, JR., Chairman and Chief The Wharton School Caterpillar, Inc. Executive Officer University of Pennsylvania The Friendship Group ROBERT R. NATHAN, Chairman LEON C. HOLT, JR., Retired Vice Nathan Associates, Inc. A.W. CLAUSEN, Retired Chairman Chairman and Chief Executive Officer Air Products and Chemicals, Inc. J. WILSON NEWMAN, Retired Chairman BankAmerica Corporation Dun & Bradstreet Corporation SOL HURWITZ, Retired President DOUGLAS D. DANFORTH Committee for Economic Development JAMES J. O’CONNOR, Former Chairman Executive Associates and Chief Executive Officer GEORGE F. JAMES Unicom Corporation JOHN H. DANIELS, Retired Chairman Ponte Vedra Beach, Florida and Chief Executive Officer LEIF H. OLSEN, President Archer-Daniels Midland Co. DAVID KEARNS, Chairman Emeritus LHO GROUP New American Schools RALPH P. DAVIDSON NORMA PACE, President Washington, D.C. GEORGE M. KELLER, Retired Chairman Paper Analytics Associates of the Board ALFRED C. DECRANE, JR., Retired Chevron Corporation CHARLES W. PARRY, Retired Chairman Chairman and Chief Executive Officer ALCOA Texaco, Inc. FRANKLIN A. LINDSAY, Retired Chairman Itek Corporation WILLIAM R. PEARCE, Director WILLIAM RUDER ALEXANDER L. STOTT American Express Mutual Funds William Ruder Incorporated Fairfield, Connecticut
JOHN H. PERKINS, Former President RALPH S. SAUL, Former Chairman WAYNE E. THOMPSON, Past Chairman Continental Illinois National Bank and of the Board Merritt Peralta Medical Center Trust Company CIGNA Companies THOMAS A. VANDERSLICE RUDOLPH A. PETERSON, President and GEORGE A. SCHAEFER, Retired TAV Associates Chief Executive Officer Emeritus Chairman of the Board BankAmerica Corporation Caterpillar, Inc. SIDNEY J. WEINBERG, JR., Senior Director DEAN P. PHYPERS ROBERT G. SCHWARTZ The Goldman Sachs Group, Inc. New Canaan, Connecticut New York, New York CLIFTON R. WHARTON, JR., Former ROBERT M. PRICE, Former Chairman MARK SHEPHERD, JR., Retired Chairman and Chief Executive Officer and Chief Executive Officer Chairman TIAA-CREF Control Data Corporation Texas Instruments, Inc. DOLORES D. WHARTON, Former JAMES J. RENIER ROCCO C. SICILIANO Chairman and Chief Executive Officer Renier & Associates Beverly Hills, California The Fund for Corporate Initiatives, Inc.
IAN M. ROLLAND, Former Chairman ELMER B. STAATS, Former Controller ROBERT C. WINTERS, Chairman and Chief Executive Officer General of the United States Emeritus Lincoln National Corporation Prudential Insurance Company FRANK STANTON, Former President of America AXEL G. ROSIN, Retired Chairman CBS, Inc. Book-of-the-Month Club, Inc. RICHARD D. WOOD, Director EDGAR B. STERN, JR., Chairman Eli Lilly and Company WILLIAM M. ROTH of the Board Princeton, New Jersey Royal Street Corporation CHARLES J. ZWICK Coral Gables, Florida CED RESEARCH ADVISORY BOARD
RALPH D. CHRISTY HELEN F. LADD RUDOLPH G. PENNER J. Thomas Clark Professor Professor of Public Policy Studies Senior Fellow Department of Agricultural, Resource, and Economics The Urban Institute and Managerial Economics Sanford Institute of Public Policy Cornell University Duke University CECILIA E. ROUSE Professor of Economics and ALAIN C. ENTHOVEN ROBERT LITAN Public Affairs Marriner S. Eccles Professor of Public and Vice President, Director of Economic Woodrow Wilson School Private Management Studies Princeton University Stanford University The Brookings Institution Graduate School of Business HAL VARIAN ZANNY MINTON-BEDDOES Class of 1944 Professor of Information BENJAMIN M. FRIEDMAN Washington Economics Correspondent and Management Systems William Joseph Maier Professor of The Economist Hass School of Business Political Economy University of California, Berkeley Harvard University WILLIAM D. NORDHAUS Sterling Professor of Economics JOHN P. WHITE ROBERT W. HAHN Cowles Foundation Lecturer in Public Policy Resident Scholar Yale University John F. Kennedy School of Government American Enterprise Institute Harvard University JOHN PALMER Professor and Dean Emeritus Maxwell School of Citizenship and Public Affairs Syracuse University
CED PROFESSIONAL AND ADMINISTRATIVE STAFF
CHARLES E.M. KOLB President
Research Communications/Government Relations Finance and Administration EVERETT M. EHRLICH MICHAEL J. PETRO LAURIE LEE Senior Vice President and Vice President and Director of Chief Financial Officer and Director of Research Business and Government Policy Vice President of Finance and and Chief of Staff Administration
JANET HANSEN MORGAN BROMAN SHARON A. FOWKES Vice President and Director Director of Communications Executive Assistant to the President of Education Studies CHRIS DREIBELBIS JEFFREY SKINNER ELLIOT SCHWARTZ Business and Government Policy Senior Accountant/Grants Administrator Vice President and Director Associate of Economic Studies RACQUEL TUPAZ CHRISTINE S. RYAN Senior Accountant/Financial Reporting VAN DOORN OOMS Program Director Senior Fellow AMANDA TURNER ROBIN SAMERS Office Manager TRACY KORNBLATT Assistant Director of Communications Research Associate
JESSICA NUZZELILLO Development Research Associate MARTHA E. HOULE Advisor on International Vice President for Development and Economic Policy Secretary of the Board of Trustees
ISAIAH FRANK NICHOLE REMMERT William L. Clayton Professor Foundation Relations Manager of International Economics The Johns Hopkins University RICHARD M. RODERO Director of Development STATEMENTS ON NATIONAL POLICY ISSUED BY THE COMMITTEE FOR ECONOMIC DEVELOPMENT
SELECTED PUBLICATIONS:
Investing in Learning: School Funding Policies to Foster High Performance (2004) Promoting U.S. Economic Growth and Security Through Expanding World Trade: A Call for Bold American Leadership (2003) Reducing Global Poverty: Engaging the Global Enterprise (2003) Reducing Global Poverty: The Role of Women in Development (2003) How Economies Grow: The CED Perspective on Raising the Long-Term Standard of Living (2003) Learning for the Future: Changing the Culture of Math and Science Education to Ensure a Competitive Workforce (2003) Exploding Deficits, Declining Growth: The Federal Budget and the Aging of America (2003) Justice for Hire: Improving Judicial Selection (2002) A Shared Future: Reducing Global Poverty (2002) A New Vision for Health Care: A Leadership Role for Business (2002) Preschool For All: Investing In a Productive and Just Society (2002) From Protest to Progress: Addressing Labor and Environmental Conditions Through Freer Trade (2001) The Digital Economy: Promoting Competition, Innovation, and Opportunity (2001) Reforming Immigration: Helping Meet America’s Need for a Skilled Workforce (2001) Measuring What Matters: Using Assessment and Accountability to Improve Student Learning (2001) Improving Global Financial Stability (2000) The Case for Permanent Normal Trade Relations with China (2000) Welfare Reform and Beyond: Making Work Work (2000) Breaking the Litigation Habit: Economic Incentives for Legal Reform (2000) New Opportunities for Older Workers (1999) Investing in the People’s Business: A Business Proposal for Campaign Finance Reform (1999) The Employer’s Role in Linking School and Work (1998) Employer Roles in Linking School and Work: Lessons from Four Urban Communities (1998) America’s Basic Research: Prosperity Through Discovery (1998) Modernizing Government Regulation: The Need For Action (1998) U.S. Economic Policy Toward The Asia-Pacific Region (1997) Connecting Inner-City Youth To The World of Work (1997) Fixing Social Security (1997) Growth With Opportunity (1997) American Workers and Economic Change (1996) Connecting Students to a Changing World: A Technology Strategy for Improving Mathematics and Science Education (1995) Cut Spending First: Tax Cuts Should Be Deferred to Ensure a Balanced Budget (1995) Rebuilding Inner-City Communities: A New Approach to the Nation’s Urban Crisis (1995) Who Will Pay For Your Retirement? The Looming Crisis (1995) Putting Learning First: Governing and Managing the Schools for High Achievement (1994) Prescription for Progress: The Uruguay Round in the New Global Economy (1994) *From Promise to Progress: Towards a New Stage in U.S.-Japan Economic Relations (1994) U.S. Trade Policy Beyond The Uruguay Round (1994) In Our Best Interest: NAFTA and the New American Economy (1993) What Price Clean Air? A Market Approach to Energy and Environmental Policy (1993) Why Child Care Matters: Preparing Young Children For A More Productive America (1993) Restoring Prosperity: Budget Choices for Economic Growth (1992) The United States in the New Global Economy: A Rallier of Nations (1992) The Economy and National Defense: Adjusting to Cutbacks in the Post-Cold War Era (1991) Politics, Tax Cuts and the Peace Dividend (1991) The Unfinished Agenda: A New Vision for Child Development and Education (1991) Foreign Investment in the United States: What Does It Signal? (1990) An America That Works: The Life-Cycle Approach to a Competitive Work Force (1990) Breaking New Ground in U.S. Trade Policy (1990) Battling America’s Budget Deficits (1989) *Strengthening U.S.-Japan Economic Relations (1989) Who Should Be Liable? A Guide to Policy for Dealing with Risk (1989) Investing in America’s Future: Challenges and Opportunities for Public Sector Economic Policies (1988) Children in Need: Investment Strategies for the Educationally Disadvantaged (1987) Finance and Third World Economic Growth (1987) Reforming Health Care: A Market Prescription (1987) Work and Change: Labor Market Adjustment Policies in a Competitive World (1987) Leadership for Dynamic State Economies (1986) Investing in Our Children: Business and the Public Schools (1985) Fighting Federal Deficits: The Time for Hard Choices (1985) Strategy for U.S. Industrial Competitiveness (1984) Productivity Policy: Key to the Nation’s Economic Future (1983) Energy Prices and Public Policy (1982) Public Private Partnership: An Opportunity for Urban Communities (1982) Reforming Retirement Policies (1981) Transnational Corporations and Developing Countries: New Policies for a Changing World Economy (1981) Stimulating Technological Progress (1980) Redefining Government’s Role in the Market System (1979) Jobs for the Hard to Employ: New Directions for a Public-Private Partnership (1978)
*Statements issued in association with CED counterpart organization in foreign countries CED COUNTERPART ORGANIZATIONS
Close relations exist between the Committee for Economic Development and independent, nonpolitical research organizations in other countries. Such counterpart groups are composed of business executives and scholars and have objectives similar to those of CED, which they pursue by similarly objective methods. CED cooperates with these organizations on research and study projects of common interest to the various countries concerned. This program has resulted in a number of joint policy statements involving such international matters as energy, assistance to developing countries, and the reduction of nontariff barriers to trade.
CE Circulo de Empresarios Madrid, Spain
CEAL Consejo Empresario de America Latina Buenos Aires, Argentina
CEDA Committee for Economic Development of Australia Sydney, Australia
CIRD China Institute for Reform and Development Hainan, People’s Republic of China
EVA Centre for Finnish Business and Policy Studies Helsinki, Finland
FAE Forum de Administradores de Empresas Lisbon, Portugal
IDEP Institut de l’Entreprise Paris, France
IW Institut der deutschen Wirtschaft Köln Cologne, Germany
Keizai Doyukai Tokyo, Japan
SMO Stichting Maatschappij en Onderneming The Netherlands
SNS Studieförbundet Naringsliv och Samhälle Stockholm, Sweden Committee for Economic Development 2000 L Street, N.W., Suite 700 Washington, D.C. 20036 Telephone: (202) 296-5860 Fax: (202) 223-0776 www.ced.org